Who are the users of accounting information and what information does accounting provides for them give at least one example?

Learning Outcomes

• Identify users of accounting information

The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. There are three primary users of accounting information: internal users, external users, and the government (which is a specific form of an external user). Each group uses accounting information differently and requires the information to be presented differently.

Internal Users

External Users

The external users of accounting information fall into five groups; each has different interests in the company and wants answers to unique questions. The groups and some of their possible questions are:

• Prospective and current board members or investors. Has the company earned satisfactory income on its total investment? Should an investment be made in this company? Should the present investment be increased, decreased, or retained at the same level? Can the company install costly pollution control equipment and still be profitable?
• Creditors and lenders. Should a loan be granted to the company? Will the company be able to pay its debts as they become due?
• Employees and their unions. Does the company have the ability to pay increased wages? Is the company financially able to provide long-term employment for its workforce?
• Customers. Does the company offer useful products at fair prices? Will the company survive long enough to honor its product warranties?
• General public. Is the company providing useful products and gainful employment for citizens without causing serious environmental problems?

Government

The government is a separate type of external user that is also interested in a company’s performance, mainly for purposes of collecting the proper amount of tax, but also for other regulatory purposes. In fact, a single company may be reporting to several state and local governments and even to foreign governments, depending on where they are doing business.

Practice Question

There are several groups of people within a business that use its accounting information, each having different needs and objectives. These groups of users are noted below.

Management

The core internal users are the managers. They need detailed performance information about each segment of the business, so that they can make ongoing corrections and enhancements to the organization. Their objectives are to maintain a steady or increasing level of cash flow, while also maintaining a prudent level of debt risk. They may also need this information to make decisions about acquisitions or divestitures.

Owners

Investors use accounting information to determine their return on investment, based on the reported cash flows being generated by the business. Depending on the outcome, investors may alter their level of investment in the business, either selling from their current positions or acquiring additional shares from others.

Employees

If employees have access to accounting information (which is not always the case), they can use it to estimate the ability of the firm to pay them an adequate level of compensation, as well as to fund any pension plan that the organization offers them. This can result in decisions to remain with the firm or seek employment elsewhere.

Unions

Unions can use a firm’s accounting information to determine its level of profitability and debt load. This information is useful for deciding how hard to push for a wage and benefits increase in the next contract negotiations. If the company is reporting marginal results, then the union might be inclined to push less hard, and vice versa.

An organisation’s financial information is recorded, examined, summarised, and interpreted through the accounting process. Accounting Information is needed by stakeholders of the firm, including the employees, owners, creditors, banks and other lenders, regulatory agencies, and tax authorities, among others, so that they can make use of the accounting information. In order to communicate with both the internal and exterior worlds, an organisation needs accounting information. 

Accounting Information can be of different types and use. Majorly there are 3 types of Accounting Information:

Types of Accounting Information:

1. Financial Accounting: Financial accounting is historical in character, i.e., it documents transactions that have already happened. It includes creation, analysis, and presentation of financial statements. The creation of the Profit and Loss Account and the Balance Sheet is the final step in financial accounting. It primarily aids in determining the financial situation as of the specified date as well as the net result for an accounting period.

2. Management Accounting: Management Accounting is concerned with the process of accumulating accounting information for internal operational reporting. It consists of many information regarding the planning, controlling, decision-making, etc., related to the firm. It includes many methods of information grouping and reports preparation that managers use to carry out their duties. Cost accounting, which deals with cost ascertainment and cost control, is a crucial part of management accounting.

3. Cost Accounting: The process of accounting for cost begins with recording income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.  The goal of cost accounting is to track, evaluate, and promote improvements in internal cost management and effectiveness. In a nutshell, cost accounting is a system for managing operational analysis.

Users of Accounting Information and their Needs:

The public, the government and its agencies, management, employees, lenders, suppliers, and other creditors in the business world are among the users of accounting information. These users make use of accounting information according to their needs:

1. Public: The public is impacted by businesses in a number of different ways. For instance, businesses may have a significant positive impact on the community’s economy through their employment of locals and the use of their suppliers. Financial statements can help the public by informing them of recent changes and trends that have affected the enterprise’s success and the scope of its activities.

2. Government and their Agencies: The allocation of resources and, consequently, business activities are of interest to the government and its agencies. They also need the information to set tax policy, control business activity and calculate various indicators, like GDP and National Income.

3. Management: In order to assess the firm’s short-term and long-term solvency, management needs information regarding the firm’s activity. Management needs accounting information to make several decisions, like determination of selling price and other strategies. It is also needed for comparison of performance with similar enterprises in the industry and to make plans for the future regarding expansion, reduction, etc.

4. Employees: The stability and profitability of the employers are topics that interest both the workforce and the groups that serve as its representatives. Additionally, they are looking for facts that will help them judge whether the company can afford to pay salaries, offer retirement benefits, and create job prospects.

5. Creditors: In order to decide whether to prolong, sustain, or restrict the flow of credit to a specific firm, short and long term creditors need to know if the amount owed to them will be paid when due. To ascertain if their principal amounts and interest accrued will be paid when due and whether to prolong, maintain, or restrict the flow of credit to a firm, short and long-term creditors need information. Such information helps them to understand the paying ability of the enterprise.

6. Present Investors: In order to assess the pros and cons of their investment, and decide whether to buy, hold, or sell the shares, current investors require accounting information.

7. Potential Investors: To evaluate an enterprise’s strengths and decide whether to purchase shares, prospective investors also require accounting information.

8. Customers: Customers are curious about an organisation’s future, especially if they depend on it or have a long-standing relationship with it. Accounting information increases or decreases a firm’s goodwill amongst its customers.

9. Tax Authorities: To determine an enterprise’s tax liabilities, tax authorities need information. In order to compare the information on tax returns with the supporting accounting records, tax authorities occasionally audit the returns filed by firms. The accounting records of suppliers and customers are also cross-checked by tax authorities to spot suspected tax evasion.

10. Auditor: Auditors examine financial statements and underlying accounting records to form an audit opinion. Investors and other interested parties rely on external auditors’ independent assessment of the correctness of financial records.

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Who are the users of accounting information and what information does accounting provides for them?