Question

Differentiate between internal users and external users and explain the examples of the accounting information required.

Answer 1

Ans- Accounting is a process by which all the transaction performed in the business are recorded, these recorded information are very much useful and vital for various users of business, almost every decision which is made in any business organisation is based on these information, and not only inside the business but also outside the business various business users uses this information to take various decisions

Broadly there are two types of users of accounting information-

1. The Internal users – Users who uses the information with in the business organisation

2. The external users – Users who uses the information outside the business organisation

Both of them required different types of information for different purpose, we can differentiate them as follows-

Internal users- These are the users who needs accounting information for the purpose of decision making, this is called management accounting , mainly the internal users includes-

a) Owners – Financial statement for the purpose of analysis of profit trend and growth in terms of earnings

b) Managers – They required to plan and manage the business organisation, they required information to prepare budgets, standards and takes various capital budgeting decisions

c) Employees – Sometime they required to prepare some types of financial report so they required information about financial statement, also they are part of an organisation they also measures the growth of organisation for their personal growth.

External Users- These are the users outside the business organisation, they required information for various purposes as per their needs, these may include

a) Investors- Investment decisions are decided with very much care and diligence, every investor who wants to invest in any business used to check their financial information before investing, and this is possible because of accounting information

b) Lenders- Lenders including banks never wants to lend their money in any risky organisation who have poor credit terms, low liquidity or debt equity ratio, they calculate all these information prior investing and this is possible by accounting information

c) Suppliers- just like lenders suppliers also do not want to block their money in a business who have low credit terms not having good credit worthiness may lead cancelation of order from supplier.

d) Customers- Mostly retail customers do not have any interest in financial statement of business , but the industrial customer who blocked their large amount of working capital with business will always have a loon on position of the company, that whether the company is able to complete its order with in a given time frame means have all the required tools and finance.

e) Tax Authorities- Tax being the major source of earning for the government of every country, tax authorities determine that the profit declared and tax calculated by the business is calculated in true and fair manner, for this purpose tax authorities used to conduct audit of tax return files by the business.