A large number of people, entities, and stakeholders have an interest in the financial well-being of businesses. A list is given below of some of the users of the information provided by accounting.
These users can be categorized under external and internal users. This is shown in the diagram below.
Internal Users of Accounting Information
Owners are the people who provide capital for the business. They need information about the financial performance and position of the business. For this reason, they use accounting information to look into the financial affairs of the business.
Management is responsible for taking work from others in the most appropriate way. Management needs accounting information to check the efforts of subordinates, ensuring that those who are working hard are properly motivated.
The owners and managers of businesses use accounting information for the following purposes:
- To understand the financial health of their business units
- To set organizational goals
- To evaluate progress toward organizational goals
- To take corrective action where needed
Decisions that are based on accounting information are more likely to be correct compared to those based on pure intuition.
Employees are the people who serve in the business. Employees are interested in accounting information because their salary appraisals, bonuses, and other monetary and non-monetary benefits are attached to the company’s financial position.
Individuals make use of accounting information in the day-to-day affairs of managing their cash and bank balances, making investments, or deciding on whether to buy or lease a car or home.
External Users of Accounting Information
Investors are the people who are ready to invest their money in a business. Investors who are looking for business opportunities can only make correct decisions based on high-quality accounting information.
An investor is interested in knowing about the financial position of the business. This kind of information is supplied in financial statements. Accounting information shows the future potential of the business in terms of future profits for investors.
Creditors give loans to businesses. Creditors use accounting information to evaluate creditworthiness and other factors since this helps to guarantee that the loan will be repaid in the future.
Accounting information also helps creditors to make decisions about whether to offer loans to a business in the future.
3. Government Agencies
Government agencies such as CBR and the Income Tax Department need accounting information from businesses in order to levy tax effectively and accurately.
Without accounting information, these agencies may miscalculate the revenues generated for the government.
Customers are divided into four categories:
- Final consumers
Producers must have assurance about the continuous supply of materials needed to make products. Similarly, wholesalers, retailers, and final consumers are interested in the fluent supply of materials.
For example, if any party (e.g., a wholesaler) believes that a product may be unavailable in the future, they will shift their choice to another product. To help make all these decisions effectively, accounting information is necessary.
The public is interested in accounting information because this informs them about the financial health of individual businesses. In turn, it is possible to determine the overall impact on the country’s economy.
6. Non-Profit Organizations
Even non-profit making organizations, including clubs, non-governmental organizations (NGOs), and welfare societies, require accounting information to manage their affairs properly.
In the absence of proper accounting records, non-profit organizations cannot satisfy their members and other stakeholders regarding the ways in which their financial affairs are conducted.