Why do businesses keep accounts, and who relies on the information they produce?
Explain the purpose of accounting and identify the main users of accounting information
A simple answer to the N(A)-Level Principles of Accounts outcome on why businesses keep accounts. The purpose of accounting, the difference between bookkeeping and accounting, and the internal and external users who rely on the information.
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What this dot point is asking
SEAB wants you to explain why accounting exists and to name the people who use the information. This is the opening idea of the whole subject: every ledger, journal and statement you will later prepare exists to answer somebody's question about the business. The central insight is that accounting is not just record-keeping for its own sake; it turns a stream of transactions into information that owners, lenders, suppliers and the tax authority use to make decisions.
The answer
What accounting is for
Accounting is the process of recording, summarising and reporting the financial transactions of a business so that useful information can be given to those who need it. A business buys and sells, pays wages, and borrows money every day. On its own this is just a pile of receipts. Accounting organises it so the business can answer three big questions:
- Did we make a profit? Answered by the income statement.
- What do we own and owe? Answered by the statement of financial position.
- Can we pay our bills? Answered by looking at cash and at what is owed.
Bookkeeping versus accounting
These two words are often mixed up. Bookkeeping is the day-to-day recording of transactions in the books, the routine part. Accounting is wider: it includes bookkeeping but also summarising the records into financial statements and interpreting what they mean. At N(A)-Level you do both, but it helps to know that drawing up a trial balance is bookkeeping while explaining a falling profit is accounting.
Internal and external users
Users are split into two groups by whether they are inside or outside the business:
| Group | Example users | What they want to know |
|---|---|---|
| Internal | Owner, manager | Is the business making a profit? Is there enough cash? |
| External | Bank, supplier, tax authority, potential buyer | Can the business repay a loan? Will it pay its bills? What is the correct tax? |
The owner is always internal. A bank deciding on a loan, a supplier selling on credit, and the tax authority are all external, because they are outside the business but still rely on its accounts.
Examples in context
Example 1. A loan application. A sole trader who runs a tuition centre asks a bank for a loan to buy new computers. The bank, an external user, looks at the centre's income statement to see if it makes a steady profit and at its statement of financial position to see what it already owns. Without these accounts the bank has no basis to lend, which shows why even a small business must keep proper records.
Example 2. Deciding whether to expand. A hawker stall owner is thinking about opening a second stall. As an internal user, the owner studies last year's profit and the cash balance to judge whether the business can afford it. The same records that satisfy the tax authority also guide the owner's biggest decision, illustrating how one set of accounts serves many purposes.
Try this
Q1. State what bookkeeping is and how it differs from accounting. [2 marks]
- Cue. Bookkeeping is the day-to-day recording of transactions; accounting also summarises those records into financial statements and interprets them.
Q2. Give one internal user and one external user of a shop's accounts, with a question each would ask. [3 marks]
- Cue. Internal: the owner, asking whether the shop made a profit. External: a supplier, asking whether the shop will pay for goods bought on credit.
Q3. Explain why a business that never made a profit might still keep accounts. [2 marks]
- Cue. It still needs to know what it owns and owes, whether it can pay its bills, and what profit or loss it actually made, and the tax authority and any lender will still want the figures.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original4 marksState two reasons why a sole trader keeps accounting records, and for each reason explain how it helps the owner.Show worked answer →
Any two of the following, each with a clear use:
To work out profit or loss. Keeping records lets the owner prepare an income statement and see whether the business made a profit, which tells the owner if it is worth continuing.
To know what the business owns and owes. Records of assets and liabilities let the owner prepare a statement of financial position and see if the business can pay its debts.
To control the business. Records show how much cash is left, who owes the business money, and how much is owed to suppliers, so the owner can chase debts and pay bills on time.
What markers reward: two distinct reasons, each linked to a real decision the owner makes, not just "to keep track of money" repeated twice.
Original5 marksIdentify one internal user and two external users of a small bakery's accounts. For each, state one thing they want to know.Show worked answer →
Internal user: the owner (or manager). Wants to know whether the bakery made a profit and whether it has enough cash to keep trading.
External users (any two):
A bank, which the bakery has asked for a loan. Wants to know whether the business can repay the loan, so it looks at profit and at the assets available.
A supplier of flour selling on credit. Wants to know whether the bakery will pay its bills, so it looks at whether the business can cover what it owes.
The tax authority. Wants to know the correct profit so it can charge the right amount of tax.
What markers reward: correctly splitting internal from external users, naming three different users, and giving each a sensible question that matches their interest.
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