Users of accounting information – Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers (Elliot, Barry & Elliot, Jamie: Financial accounting and reporting). You are studying, Who are the Users of Accounting Information inside the Organization? In the Business have two types of person Internal and External. Users of accounting information – Internal users (Primary Users) – Owners, Management, and Employees. Also External users (Secondary Users) – Investors, Creditors, Members of Non-profit Organisations, Lenders, Suppliers, Government, General public, Customers, Regulatory Authorities, and Research Scholars. Accounting has been defined as – the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof. So, what is the question we discuss; Who are the Users of Accounting Information inside the Organization?
In the Business have two types of person Internal and External. Who are the Users of Accounting Information inside the Organization?
The Following are:
Who are the Main Users of Accounting?
Accounting information of a business enterprise is used by a number of parties. Different parties use accounting information for different purposes depending on their needs. Therefore, the accounting information system of a business enterprise must be designed in a way that should generate reports to satisfy the needs of everyone interested in accounting information. Accounting provides financial data so individuals can analyze the financial health and stability of a business. While there are many users of accounting information there are also many reasons why this information would be needed.
Some reasons can include measuring the financial performance of assets, liabilities, equity, income, expenses and cash flow all in order to have the information to make better financial decisions. Other reasons include making financial decisions for investment, credit and operational decisions. There are several types of users who will use financial statements for managerial accounting, but they generally fit into either internal or external users. Each group will use this information for different purposes.
Users of Accounting Information is Two types Internal & External:-
Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization.
Who are internal users of accounting?
Internal users of accounting information (sometimes known as internal users), typically work within the company. Internal users (Primary Users) of accounting information include the following:
Owners invest capital to start and run business with the primary objective to earn the profit. They need accurate financial information to know what they have earned or lost during a particular period of time. On the basis of this information, they decide their future course of actions such as expansion or contraction of business. The owners provide funds for the operations of a business and they want to know whether their funds are being properly used or not. They need accounting information to know the profitability and the financial position of the concern in which they have invested their funds. The financial statements prepared from time to time from accounting records depict them the profitability and the financial position.
Management uses accounting information for evaluating and analyzing an organization’s financial performance and position, to take important decisions and appropriate actions to improve the business performance in terms of profitability, financial position, and cash flows. One of the major roles of management is to set rules and procedures to achieve organizational goals. For this purpose, management uses the information generated by financial as well as managerial accounting system of the organization. Management is the art of getting work done through others, the management should ensure that the subordinates are doing work properly.
Accounting information is an aid in this respect because it helps a manager in appraising the performance of the subordinates. Actual performance of the employees can be compared with the budgeted performance they were expected to achieve and remedial action can be taken if the actual performance is not up to the mark. Thus, accounting information provides “the eyes and ears to management”. The most important functions of management are planning and controlling. Preparation of various budgets, such as sales budget, production budget, cash budget, capital expenditure budget, etc., is an important part of planning function and the starting point for the preparation of the budgets is the accounting information for the previous year.
How to Control?
Controlling is the function of seeing that programs laid down in various budgets are being actually achieved i.e. actual performance ascertained from accounting is compared with the budgeted performance, enabling the manager to exercise controlling case of weak performance. Accounting information is also helpful to the management in fixing reasonable selling prices. In a competitive economy, a price should be based on cost plus a reasonable rate of return. If a firm quotes a price which exceeds cost plus a reasonable rate of return. It probably will not get the order. On the other hand, if the firm quotes a price which is less than its cost, it will be given the order but will incur a loss on account of the price is lower than the cost. So, selling prices should always be fixed on the basis of accounting data to get a reasonable margin of profit on sales.
Employees are interested in the financial position of a concern they serve particularly when payment of bonus depends upon the size of the profits earned. They seek accounting information to know that the bonus is paid to them is correct. Occasionally, employees will use accounting information to see how stable a company is for their job security. More often though, employees will be interested in a business’s financial information when it relates to their income as sometimes bonuses, commissions, profit sharing or other financial metrics are used as a financial incentive.
Employees who do not have a hand in the core management of the business are considered external users of accounting information. They are interested in financial information because their present and future are tied up with the success or failure of the business. The success and profitability of business ensure job security, better remuneration, job promotion, and retirement benefits.
Who are the external users of accounting?
External users of accounting information (sometimes called secondary users), External users (Secondary Users) of accounting information include the following:
Incorporate the form of business, the owner is often separated from the management. Normally investors provide capital and management run the business. The accounting information is used by both actual and potential investors. Actual investors use this information to know how their funds are used by the management. And, what is the expected performance of the business in the future in terms of profitability and growth? On the basis of this information, they decide whether to increase or decrease investment in the corporation in the future.
Investors use accounting information;
Potential investors use accounting information to decide whether or not a particular corporation is suitable for their investment needs. Those who are interested in investing money in an organization are interested in knowing. The financial health of the organization to know how safe the investment already made is and how safe their proposed investment will be. To know the financial health, they need accounting information. Which will help them in evaluating the past performance and future prospects of the organization?
Thus, investors for their investment decisions are dependent upon accounting information included in the financial statements. They can know the profitability and the financial position of the organization in which they are interested to make. That investment by making a study of the accounting information given in the financial statements of the organization.
Use the financial information to make decisions whether credit will be extended or restraints on spending will be put in place to pay down debts owed to the creditor. Before extending credit, banks typically require businesses to present financial statements to judge creditworthiness. Creditors (i.e. supplier of goods and services on credit, bankers and other lenders of money) want to know the financial position of concern before giving loans or granting credit.
They want to be sure that the concern will not experience difficulty in making. Their payment in time i.e. the liquid position of the concern is satisfactory. To know the liquid position, they need accounting information relating to current assets, quick assets and current liabilities. Which is available in the financial statements.
#Members of Non-profit Organisations
Members of non-profit organizations such as schools, colleges, hospitals, clubs, charitable institutions, etc. Need accounting information to know how their contributed funds are being utilized and to ascertain. If the organization deserves continued support or support should be withdrawn from keeping in view the bad performance depicted by the accounting information and diverted to another organization. In knowing the performance of such organizations. The criterion will not be the profit made but the main criterion will be the service provided to society.
Lenders are individuals or financial institutions that normally lend money to businesses and earn interest income on it. They need accounting information to assess the financial performance and position and to have a reasonable assurance that the business to whom. They are going to lend money would be able to return the principal amount as well as pay interest thereon.
Suppliers are business individuals or organizations that normally sell merchandise or raw materials to other businesses on credit. They use accounting information to have an idea about the future creditworthiness of the business and to decide whether or not to continue providing goods on credit.
Government agencies use the financial information of businesses for the purpose of imposing taxes and regulations. Central and State Governments are interested in the accounting information because they want to know earnings or sales for a particular period for purposes of taxation. Income tax returns are examples of financial reports which are prepared with information taken directly from accounting records. Governments also need accounting information for compiling statistics concerning business which, in turn, helps in compiling national accounts.
The general public also uses accounting information for business organizations. For example, accounting information is:
- Education for students of accounting and finance.
- Valuable data for those researching on organizational impacts on individuals and the economy as a whole.
- Information for the people looking for job opportunities.
- Information about the future of a particular enterprise.
Accounting information provides important information to customers about the current position of a business organization and to make a judgment about its future. Customers can be divided into three groups – manufactures or producers at various stages of production, wholesalers and retailers and end users or final consumers. Consumers need accounting information for establishing good accounting control. So that cost of production may be reduced with the resultant reduction of the prices of the goods they buy. Sometimes, prices for some goods are fixed by the Government. So it needs accounting information to fix reasonable prices so that consumers and manufacturers are not exploited.
Prices are fixed keeping in view fair return to manufacturers on their investments shown in the accounting records. Manufacturers or producers at every stage of processing need assurance that the organization in question will continue providing inputs such as raw materials, parts, components, and support, etc. The wholesalers and retailers must be assured of the consistent supply of products. The end users or final consumers are interested in the continuous availability of products and related accessories. Because of these reasons, accounting information is of significant importance for all three types of customers.
For ensuring that the company’s disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders. Who rely on such information in forming their decisions.
Accounting information, being a mirror of the financial performance of a business organization is of immense value to the research scholars. Who wants to make a study to the financial operations of a particular firm. To make a study into the financial operations of a particular firm, the research the scholar needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities, and shareholders’ funds. Which is available in the accounting records maintained by the firm.