Who are the Users of Accounting? Explained

Are you wondering Who are the Users of Accounting Information? we have got you covered. An accounting Information System (AIS) is a system that collects, stores, and processes accounting and financial data.

This financial data is useful for users of accounting information systems for reporting the financial information to Owners/Shareholders, Managers, Prospective Investors, Creditors, Bankers, other Lending Institutions, the Government, etc. Let us learn more about the Characteristics and users of accounting information systems.

FINANCIAL REPORTING

The objective of financial reporting is to provide financial information about the reporting entity that is useful to exist and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

The information explains the financial position of an entity at the end of a period (usually a year) and the financial performance of the entity over that period.

RESPONSIBILITY FOR PREPARING FINANCIAL STATEMENTS

Sole trader and partnership businesses

There may be no obligation to prepare financial statements, other than for tax purposes or obtaining a loan from a bank, for which the owner/partners are responsible. They might employ a person or persons to maintain the accounting records and prepare financial statements.

Companies

Companies must prepare financial statements for shareholders and for filing with relevant regulatory bodies. It is the responsibility of the directors to ensure that this is done. Usually, the work is delegated to employees.

REGULATION FOR PREPARING FINANCIAL STATEMENTS

Sole trader and partnership businesses

The financial statements are private and do not have to be disclosed, except to the tax authorities (and possibly also to a lending bank). These must be prepared according to accepted accounting principles and practices but need not conform to all the requirements of accounting standards.

Companies

The financial statements of a company are prepared for the shareholders of the company and are usually subject to audit. An audit is the examination of the financial statements by an independent expert who expresses an opinion as to whether they are fairly presented (show a true and fair view).

Company law requires that financial statements are filed with a government agency, where they can be accessed and read by any member of the general public. Listed companies are even required to make their financial statements available on their websites.

The concepts, principles, conventions, laws, rules, and regulations that are used to prepare and present financial statements are known as Generally Accepted Accounting Principles (GAAPs).

INFORMATIONAL NEEDS OF USERS OF FINANCIAL STATEMENTS

Financial statements are drafted to provide information that should be useful to most users but will not
necessarily satisfy all of their needs.

There are primarily two types of users of accounting information;

Internal users (primary users) – If a user of the information is part of the business itself then he/she is considered as one of the internal or primary users of accounting information.

For example, management, owners, employees, etc. The branch of accounting that deals with internal users are called management accounting.

External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information.

For example, potential investors, lenders, vendors, customers, legal and tax authorities, etc.

Internal Users of Accounting Information – (Primary)

Following are the primary users of accounting information:

Management

The organization’s internal management includes all junior and senior business managers.

They use it for:

  • Budgeting, forecasting, analysis & take important financial decisions.
  • Investment decisions, identification of warning and opportunity signals.
  • Taking informed & evaluated decisions.
  • Compliance with all statutory, regulatory, and any other external body.

Owners/Partners

Owners are the legal stakeholders of the business and the ultimate signing authority.
They use it for

  • Tracking their investment and monitoring their return on investment.
  • Observing their capital invested and evaluating its upward or downward move.
  • Keeping an eye on the overall well-being of the business.

Employees

Full-time & part-time workers. They are essentially on the company’s payroll.

They use it for

  • Checking the overall financial health of the company as it affects their remuneration and job security.
  • Decision making in case of shares based payment such as ESOPs offered by the employers.
  • Examining if the employer is depositing all required funds to the appropriate authorities such as the provident fund, 401(k), etc.

External Users of Accounting Information

Investors

They need the information to assess whether to buy, hold or sell an investment in the business. Financial statements also, give some indication of the ability of a company to pay dividends to its shareholders out of profits.

Lenders

Financial statements can help lenders to assess the continuing ability of the borrower to pay interest, and its ability to repay the loan principal at maturity.

Suppliers

They can use the financial statements to assess how much credit they might safely allow to the entity.

Government

They might use this information for the purpose of business regulation or deciding taxation policies.

The public

In some cases, members of the general public might have an interest in the financial statements of a company. The IASB Framework comments: ‘For example, entities may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers.

Customers

Customers might be interested in the financial strength of an entity, especially if they rely on that entity for the long-term supply of key goods or services.

Leave a Comment