A. There are two parties that decide what accounting information is useful and what is not. One is the users. It is a grave mistake for economic decision makers to leave this decision up to the "experts". If the accounting profession is not providing the information users need, or is not preparing it in a way that makes sense, the users must demand a change. The second party that decides what accounting information is useful and what is not is the accounting profession—but always with the proviso that the information should be tailored to the needs of users.
B. The decisions made by internal and external decision makers are similar in some ways, but so different in other ways that two separate branches of accounting have developed to meet the needs of these two categories of user. The accounting information generated specifically for use by internal decision makers is the product of what is called management accounting, while that generated for use by external parties is the product of what is called financial accounting.
C. Much of human life revolves around economic issues. We will be better equipped to deal with these issues and their effects on our daily lives if we understand the economic decision-making process and the information that affects it. First, let’s take a look at the people making economic decisions. Economic decision makers can be divided into two broad categories: internal and external. Internal decision makers are individuals within a company who make decisions on behalf of the company, while external decision makers are individuals or organizations outside a company who make decisions that affect that company.
D. The first characteristic of internal decision makers is they make decisions for the company. In other words, they act on behalf of the company. They decide such things as whether the company should sell a particular product, whether it should enter a certain market, and whether it should hire or fire employees. Note that in all of these matters, the responsible internal decision maker is not making the decision for herself of himself, but rather for the company. The second characteristic of internal decision makers is that they have greater access to the financial information of the company than do people outside the company.
E. Economic decision making involves the evaluation of alternatives. In order to be useful in such an evaluation, the accounting information for one alternative must be comparable to the accounting information for the other alternative(s). For example, assume you intend to make an investment and are considering two companies as investment alternatives. If the two companies use totally different accounting methods, you would find it very difficult to make a useful comparison. Comparability is an important quality of accounting information in many decision-making settings.