Generally speaking, it is a record keeping practice that involves maintaining a second set of account books. A shadow accounting system consists of a separate record/ account of transactions, maintained independently of the primary bookkeeping process, for certain purposes such as identification of mistakes and inconsistencies, tracking of performance, etc. A shadow accounting system is usually operated at a local level, independent of the centralized system of record.

In it specific meaning, shadow accounting (in sales compensation) is to the practice of maintaining a separate and unofficial record-keeping system to track and estimate compensation (commissions or bonuses) for salespeople. This is done to reconcile any discrepancies that may arise between the official system and salespeople’s expectations. However, it may also involve attempts to manipulate or exaggerate sales results to maximize compensation.

In relation to loans/ debts, shadow accounting may be applied as to any sort of troubled debts in order to make recovery more likely. It provides for ease of tracking and transparency for what a borrower owes on the debt (as interest is not calculated on the lender’s accounting books). Reconciliation of the lender-borrower accounts can be difficult and error prone. As a fix, shadow accounting is based on charging-off an account and creation of two sibling accounts- one for the “charged-off” balances where no interest is calculated and a second “shadow” account. This shadow account, not missing a slightest detail, features all the same balances, continues to accrue interest, develop statements, etc., as if the loan was never charged-off.

It is also sometimes referred to as shadow auditing.