A level-readyAll subjects · Accounting · WAC11 The Accounting System and Costing
The purpose of accounting and its users
Edexcel IAL Accounting · WAC11 The Accounting System and Costing
Accounting records what a business does in money terms, analyses it and communicates it to the people who need it. This lesson covers why accounting exists, who uses it and how managers rely on it (spec 1.1.1 and 1.1.2).
Record, analyse, communicate
Accounting has three linked roles:
- Recording: every transaction is written up in books of prime entry and ledgers, using double entry.
- Analysing: the records are summarised and interpreted, for example by calculating profit, ratios and costs.
- Communicating: the results are presented to users in a standard form, mainly the statement of profit or loss and the statement of financial position, plus reports for managers.
Who uses accounting information
| User | What they want to know |
|---|---|
| Owner (sole trader, partners) | Profit earned, return on capital, how much can be drawn |
| Managers | Costs, budgets, prices, which products or departments make a profit |
| Lenders (banks) | Ability to pay interest and repay the loan; security available |
| Trade suppliers | Liquidity: will the business pay on time if given credit? |
| Employees | Job security and ability to pay wages and bonuses |
| Tax authorities | Taxable profit |
| Customers | Whether the business will survive to supply goods and honour guarantees |
| Potential buyers or investors | Value of the business and its future profits |
How managers use accounting information
Managers use accounting information to:
- plan: budgets and forecasts of revenue, costs and cash;
- control: compare actual results with budgets and act on differences;
- make decisions: set prices from costs, choose between machines or suppliers, decide whether to close a loss-making department;
- appraise performance: ratios compared with last year and with competitors.
Financial accounting produces historical statements for external users in a standard format. Management accounting (costing, budgets) produces forward-looking information for internal use, in any format that helps.
Worked example
A trade supplier is asked to give a new customer 60 days' credit. What accounting information would help, and why?
- The supplier needs to know whether the customer can pay on time.
- Useful information: the customer's current ratio and liquid ratio, the trade payables payment period (how quickly it pays its suppliers now) and its bank balance or overdraft.
- A long payment period or a low liquid ratio would suggest the customer may pay late.
Answer: Liquidity information from the statement of financial position, especially the liquid ratio and the payables payment period, because the supplier's risk is late payment or non-payment.
Check yourself
- Which user is mainly concerned with whether a business can pay for goods bought on 30 days' credit?
- The tax authority
- An employee
- A trade supplier
- A customer
Show answer
A trade supplier. Trade suppliers give credit, so they look at liquidity and payment record.
- A bank is deciding whether to lend £50,000 for five years. What is its main interest in the accounts?
- Ability to pay interest and repay the loan
- The value of the owner's house
- The prices charged to customers
- The number of staff employed
Show answer
Ability to pay interest and repay the loan. A lender wants evidence of profits and cash flows to cover interest and repayment, and assets that could act as security.
- Which statement best describes management accounting compared with financial accounting?
- It must follow a legally set format
- It is prepared only once a year for external users
- It is prepared for internal users and is often forward-looking
- It records only cash transactions
Show answer
It is prepared for internal users and is often forward-looking. Management accounting (costing, budgets) helps managers plan and control, in whatever format helps them.
- Preparing a statement of financial position for the owner and the bank is an example of which role of accounting?
- Recording
- Communicating
- Auditing
- Budgeting
Show answer
Communicating. Presenting summarised results to users is communicating.
- Explain one way accounting information helps the manager of a business.
Show answer
Managers use budgets of costs and revenue to plan, then compare actual results with the budget so they can take action to control costs.. A good answer names a use (planning, control, pricing, decision making) and says what it lets the manager do.
- Why do tax authorities use a business's financial statements?
- To decide the selling price of goods
- To assess the tax due on profit
- To set wage rates for staff
- To approve bank loans
Show answer
To assess the tax due on profit. Tax on a sole trader's business profit is based on the profit in the accounts, adjusted under tax rules.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.