Accounting as information

Every step of accounting produces information, and the whole point of that information is to help someone decide something: should the bank give a loan, should the owner open a new branch, should a supplier sell on credit?

Accounting has three branches. Financial accounting records the transactions and works out the profit or loss and the position of the business. This is what your book teaches. Cost accounting works out what a product really costs, so that a price can be fixed. A pair of spectacles costs plastic and paint to make, but also a share of the guard's salary, the factory rent and the office staff. Management accounting gives managers information to plan for the future and keep things under control. Cost and management accounting both depend on the records that financial accounting keeps.

For the information to be useful, it needs four qualities.

• Reliable: free from errors and bias, backed by evidence (bills, receipts) that anyone can check, and a faithful picture of what happened. No personal guesswork.
• Relevant: about things that matter, and available in time. Figures that arrive after the decision is made are no help. Good information also helps predict what comes next and check what went before.
• Understandable: presented clearly, so the reader takes it in the same sense the accountant meant. If results are clearly presented, that is understandability.
• Comparable: you can compare this year with last year, or your firm with another. That only works if the same period, the same unit (rupees) and the same format and methods are used every time.

A memory trick for comparability: you can compare a horse with a horse, not a horse with a donkey. If a firm changes how it values its stock every year, one year's figures cannot be compared with the next.