Accounting is aimed at providing relevant financial information for users to make informed decisions. These users of accounting information are categorized into two and they are:
- Internal users,
- External users.
Internal Users Of Financial Information
These are the primary users of financial information prepared by the management of an entity. As the name implies, they can be found in the organization. The three internal users are:
These are the people who manage the day-to-day affairs of the business on behalf of the shareholders. The management comprises the board of directors and other management staff. They require the use of accounting information to monitor the performance and efficiency of their policies and in order to allocate capital effectively across areas of the business.
Where the management needs to ascertain the business performance, they may need to compare current performance against past performance, industry benchmarks, or competitor’s performance using accounting information provided in the financial statements.
Where the management needs to make investment decisions, it’ll need the accounting information of the prospective entity to know whether such investment will result in economic gain for the entity.
These are the owners of the business. It is the owners who employ the management team to oversee the affairs of the business. They require accounting information to assess the performance of the management and to understand how the company is faring.
The accounting information contained in the financial statements helps the shareholders to understand the profitability and stability of the business and it helps them in making further investment decisions like selling or increase their shares in the business.
They primarily need accounting information to assess their job and income security. In the case where employees have shares in an entity, in addition to their job security, they’ll need the accounting information to make decisions concerning their investments in the company.
On the other hand:
Let’s delve deeper into the external users of accounting information.
External Users Of Financial Information
They are users other than the primary users of accounting information. They range from creditors, banks, investors, government, and its agencies to many other stakeholders.
These are the account payables of the company, they are the people being owed by the business.
They’ll also need accounting information to determine the creditworthiness of the reporting business. It helps them to plan their debts too.
Government And Its Agencies:
Government regulatory agencies like tax authorities need accounting information to assess businesses to tax.
Just so you know:
Lawmakers and other policymakers also require accounting information to formulate or make changes to existing laws or policies.
They need the accounting information of a business to know whether the entity will still be able to ensure a steady supply of goods at fair prices in the foreseeable future.
The accounting information of a business is the basis upon which investors and prospective investors would decide whether to invest, keep or sell their investment in a business. From the accounting information, they’ll be able to compute key financial ratios which would guide them in making investment decisions.
The accounting information of an entity is the basis upon which external auditors would form an opinion on whether the financial statements provided are true and fair or otherwise.
Other businesses in the same industry would be interested in the accounting information of business in order to compare the performance of firms across the industry.
The general public needs the accounting information of a business to decide whether or not to associate with an entity.
This category includes money lenders, banks, and other financial institutions. The accounting information helps them to make decisions on how much credit they can make available for the business.
Other external users include media/journalists, financial analysts, trading partners, and others.
Going forward, you should be able to identify the various users of accounting information and their respective use of the information with less hassle.