Question

1. identify three (3) groups of financial statement users and explain how each group uses the accounting information.
2. State the accounting equation and explain each composition of the equation.
3. Describe the effects of business transactions on the accounting equation in terms of increase or decrease of accounting equation elements.   

Answer 1

Answer:

Three groups of Accounting users are as follows:

• Internal Users of Financial Statement
• External Users of Financial Statement
• Government agencies etc.

1. Internal Users of Financial Statements: Internal Users are those users who are part of the organization such as Management, employees, etc. Management uses the financial statements to judge the profitability of the organization, Employees are also interested to know the financial position so that they can ask for a bonus, etc.  

2. External Users are those users who are not an internal part of an organization such as:

Lender: Lender rely on the financial statement while providing the loans & advances to the organization

Creditors: Creditors are interested to know whether the organization is able to pay the amount for credit purchase or not.

3. Government Agency is interested in Financial statements so that they can be asked the organization for payment of Tax etc.

Accounting Equation:

Assets = Equity + Liabilities

Assets: Assets are the resources controlled by the enterprises & which have the future economic benefit.

Liabilities: Liabilities are the obligation settlement of which requires outflow.

Equity: Equity is the part of capital & reserves that has no obligation to pay.

Elements which results in an increase or decrease in accounting Equation:

• Expenses paid
• Capital Contribution
• Purchase of Assets
• Settlement of liabilities
• Creation of provision etc.