3
Recording Financial Transactions
and the Limitations of Accounting
In order to understand the scorekeeping process, we need to understand how
accounting captures information that is subsequently used for planning, decision-
making and control purposes. This chapter describes how business events are
recorded as transactions into an accounting system using the double-entry method
that is the foundation of accounting. In this chapter we also show how the principles
underlying accounting can limit the usefulness of accounting information as a
management tool. Finally, the chapter introduces the notion of cost, and how cost
may be interpreted in multiple ways.
Business events, transactions and the accounting system
Businesses exist to make a profit. They do this by producing goods and services
and selling those goods and services at a price that covers their cost. Conducting
business involves a number ofbusiness eventssuch as buying equipment, purchas-
ing goods and services, paying expenses, making sales, distributing goods and
services etc. In accounting terms, each of these business events is a transaction. A
transactionis the financial description of each business event.
It is important to recognize that transactions are a financial representation of
the business event, measured in monetary terms. This is only one perspective
on business events, albeit the one considered most important for accounting
purposes. A broader view is that business events can also be recorded in non-
financial terms, such as measures of product/service quality, speed of delivery,
customer satisfaction etc. These non-financial performance measures (which are
described in detail in Chapter 4) are important elements of business events that
are not captured by financial transactions. This is a limitation of accounting as a
tool of business decision-making.
Each transaction is recorded on asource documentthat forms the basis for
recording in a business’s accounting system. Examples of source documents are
invoices and cheques. Theaccounting system, typically computer based (except for
very small businesses), comprises a set of accounts that summarize the transactions
that have been recorded on source documents and entered into the accounting