Australia has a preferential voting system. This means that people rank election candidates in their order of preference rather than simply casting a vote for a single candidate.
Allocating preferences can sometimes take days or even weeks in a close contest, but people want to know who won the election as soon as possible after the polls close. The 2 party preferred counting method is used to determine who is most likely to have won in each seat within hours rather than days or weeks.
Based on the history of the seat, and knowledge of current polling, the Senior Electoral Officer in each electorate decides which two candidates are likely to come first and second after preferences are formally distributed. In most, but not all, cases this will be the ALP candidate and a candidate from the Liberal/National Coalition.
Two piles are then made, one for each of these 2 candidates. Each vote is quickly examined by electoral officers and placed onto a pile depending on which of the two "preferred" candidates appears first in its preferences. Once all the votes have been placed on the appropriate pile a count of each pile provides the 2 party preferred result.
Once the 2 party preferred result has been noted the votes are sealed and moved from the polling place to a central location where preferences are formally allocated. This process usually begins on the Monday following the election and may take several days, or even several weeks to complete.
In most cases the 2 party preferred result is sufficiently clear for candidates to accept victory or concede defeat within hours of the poll closing.
It is important to note that the 2 party preferred count on election night does not determine the outcome of the election in any way. It is only a quick guide that tells the electorate who is most likely to win when a full allocation of preferences takes place. If the Senior Electoral Officer is wrong when he or she decides who is most likely to come first and second in the poll, the 2 party preferred count is meaningless. Sometimes this does happen, although it is usually noticed and corrected before the figures are published.
Between elections private polls, such as the Morgan Poll, are regularly conducted to let the Parties know how they are percieved by the electorate. Often the pollster asks whether the person being polled would be more likely to vote for the Australian Labor Party or the Liberal/National Coalition. The result of the poll is then published as a 2 Party Preferred result. With up half Australians deciding who they will vote for in the final days of an election campaign, these polls are only a rough guide at best.