Users of Accounting Information: Why they need this information?
Users of accounting information
An accounting information system processes financial and operational data into reports. These reports are useful for users of accounting information. The two broad groups of users of accounting information are internal users and external users.
Let’s have a look at who are internal and external users of accounting information and why they need this information.
Internal users of accounting information
Internal users of accounting information are individuals who plan, organize, and run the business. They are primary users of accounting data. These include owners, managers, and employees.
Internal users need detailed information on a timely basis to better answer the following questions.
- Is there sufficient cash to pay dividends to the company’s stockholders?
- What price a company should charge for XYZ product to maximize the company’s net income?
- Is the company able to raise the salary of employees this year?
- Which product line is the most profitable? Should any product lines be added or eliminated?
Let’s list down all the internal users and explore their informational needs.
Owners use accounting information to assess the feasibility and profitability of their investment. This information enables them about the organization’s ability to pay dividends.
Accounting information is helpful when they assess the stability of the overall business and prepare future courses of action.
The managers are those individuals who are authorized by the owners to operate the business. They need this information because they develop goals, strategic plans, company policies, and make decisions based on the organization’s directions.
Information about the financial stability and profitability of the employer is much important for the employee. It enables them to determine the job security and the ability of the employer to pay higher wages or provide more job opportunities in the future.
External users of Accounting information
External users are individuals and organizations outside a business entity who need financial information about the business entity. The two most common types of external users are investors and creditors.
External users are secondary users of accounting information. They need accounting information to support their decisions. Here are a few examples of questions asked by external users.
- How to compare company X with company Y in terms of size and profitability?
- Will company X be able to pay its debt before the due date?
- Is the company X operating within the prescribed rules?
- Will company X continue to offer product warranties to customers?
Let’s list down all the external users and explore their informational needs.
- Tax authorities
- Regulator agencies
- Labor unions
Investors are the providers of capital in the business. They need information so that they could make investment decisions. They use accounting information to decide whether to buy, hold, or sell ownership shares of a business entity.
Their decisions might depend on the analysis of past financial performance of the company and its financial position. They also try to predict from the past what might happen to the company in the future.
Creditors are usually suppliers and bankers. They use accounting information to estimate and evaluate the risk of granting credit or lending money. Financial statements assist the lenders to determine the borrower’s continues ability to pay interest and repay the principal of the loan at maturity.
Customers are interested in the financial strength of an entity, particularly when they rely on that entity for the long-term supply of key goods or services.
External auditors are external users of accounting information. They examine the financial statements and other accounting records of the business in order to form an audit opinion.
Independent opinion of external auditors is proof of the accuracy of financial statements. It is important for the stakeholders of the business.
Tax authorities need accounting information to determine the correct amount of tax in their tax returns. The tax authorities conduct an audit of books of accounts in order to assess the authenticity of tax information.
An example of a regulatory agency is the Securities and Exchange Commission or the Federal Trade Commission. They want to know whether the company is operating within prescribed rules.
Labor unions work for the protection of labor rights. They need accounting data because they want to know whether the owners have the ability to pay increased wages and benefits.
The general public also takes interest in accounting information for different purposes. They include journalists, academics, analysts, students, or more others who fall into the category of external users.
This is a nice place to learn