Accounting is said as the language of business. It is useful for communicating the financial results of the entity to various stakeholders by way of financial statements.
As you are aware that one of the main objectives of accounting is to provide information to Users of financial information for rational decision making.
Generally, users of accounting information are classified into two types:
- Internal users consist of Owners, Management, and Employees.
- External users which consist of Prospective investors, Suppliers, Customers, Lenders, Government, Regulatory agencies, the General Public, and researchers.
Let’s understand all the Users of accounting information in detail and their information requirements.
Internal Users of Accounting Information
Internal users are also known as Primary users of accounting information. The information requirements of internal users are served by management accounting for effective decision making.
3 types of Internal users and their information requirements are as follows:-
(i) Owners or stockholders
Owners provide capital to the business with the primary objective of earning rewards by way of profits and dividends. They need information about the financial position of business such as its current earnings, ability to survive, growth potential, and dividend payouts.
Owners need the information to assess their investments and take rational decisions about future strategies to buy, hold, or sell their stocks.
In a non-corporate sector such as sole proprietorship, partnerships. There is no separation between ownership and management but still, there is an information need from the owner to take decisions whether to continue or shut down the business.
Management is interested in accounting information for taking various managerial decisions regularly.
Based on accounting information, Management evaluates the impacts of various managerial decisions take in past on the financial position of the entity and helps in deciding the future action plans.
Based on accounting information management not only take the financial decision but also decides the allocation of various resources such as workers, stocks, etc.
Employees are also interested in accounting information of organizations.
Employees belonging to the accounting and finance department need accounting information for the preparation of financial statements, audits, and communication of financial results to stakeholders.
Employees belonging to other departments are interested to know the growth, stability, and continuity of organization as the growth of employee are directly related to organizations growth.
Accounting information also helps employees to make a rational decision about the subscription of employee stock option plans and stocks during Initial public offers.
External Users of Accounting Information
External Users can also be termed as outsiders or Secondary users.
The information requirements of these users are mainly fulfilled by financial accounting. Financial accounting is one of the sub-field of accounting concerned with the preparation of financial statements and reports.
External users are depended on these financial reports for effective decision making.
6 Types of external users are discussed as under along with their information needs:-
Lenders are interested to know the financial position of the entity to determine its ability to repay loan and principal whenever it becomes due.
Lenders use financial statements to determine the creditworthiness of their prospective borrowers based on their liquidity and solvency position before sanctioning of loans to them.
Nowadays, Lenders also conduct an independent audit at periodical intervals to determine the financial health of borrowers.
(ii) Suppliers or Trade partners
Suppliers are interested to know whether the entity will be able to honor its dues on a timely basis. These will help suppliers to determine the credit policies, rates to be charged and discounts to be offered to there trading partners.
Sometimes suppliers are completely dependent on the large entity for the survival of their business. These suppliers are not only interested in the liquidity position of their trading partner but also their ability to sustain the competitions and future growth potentials.
Suppose, small suppliers, supply their products to large entities, if a large entity shuts down there operations it will also impact small suppliers whose survival was completely dependent on these large entities.
(iii) Prospective Investors
Prospective investors use accounting information published by the entity to determine whether to invest in the organization or not.
Based on the financial position of the entity prospective investors can also determine the amount of money to invest, the appropriate time for investment and expected returns, etc.
Customers can be bifurcated into two types: – End-users and Manufacturers/Producers
End users are generally not interested in the financial position of the entity. They are concerned about the availability of products on a timely basis.
But, Manufacturers or producers are concerned about the profitability and stability of its suppliers because some manufacturers are completely dependent on one supplier for their raw materials and timely supply of inputs is essential for manufacturers to perform their operations.
For example: – A company produces ink used by pen manufacturers and supplies ink on 30 days credits. If all of the sudden ink producing company shuts its operations and unable to supply ink to its customers (i.e. Pen manufacturers) will be in a state of trouble.
(v) Government and Regulatory agencies
Government and various regulatory agencies regulate the functions of business enterprises by creation and amendment of laws, rules, and regulations, the imposition of taxes and controlling prices, etc.
Accounting information published by business entities is continuously monitored by government agencies to check whether entities are performing their operations in compliance with prevailing laws and regulations, Statutory payments are made on a timely basis or not. This accounting information is also used by tax agencies as a base for performing tax assessments.
(vi) General Public
The public at large is also interested to know the information of business enterprises for the following purposes:-
- Employment opportunities generated.
- Steps were taken for uplifting the society by way of CSR activities or through any other mode
- New products to be introduced in the near future
- Major investments or expansion made
- Scholars also use accounting data published by an entity for performing research in accounting theories and practices.
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