Question

Describe the uses and user of accounting information

Answer 1

Accounting helps users in making better financial decisions.

Some users and their uses are mentioned hereunder:

Owners

Owners need to assess how well their business is performing.

Financial statements provide information to owners about the profitability.

Owners are also interested in knowing how risky their business is.

Accounting information helps owners to decide if they should invest any further in the business or if they should use their financial resources elsewhere in more promising business ventures.

Managers

Managers need accounting information to plan, monitor and make business decisions.

Managers need to allocate the financial, human and capital resources towards competing needs of the business through the budgeting process.

Preparing and monitoring budgets effectively requires reliable accounting data relating to the various activities, processes, products, services, segments and departments of the business.

Management requires accounting information to monitor the performance of business by comparison against past performance, competitor analysis, key performance indicators and industry benchmarks.

Managers rely on accounting data to form their business decisions such as investment, financing and pricing decisions.

Employees

For the employees operating in the finance department, using accounting information is usually part of their job description. This includes for example preparing and reviewing various financial reports such as financial statements.

Employees are interested in knowing how well a company is performing as it could have implications for their job security and income.

Many employees review accounting information in the annual report just to get a better understanding of the company’s business.

In recent years, the increase in number of shares and share options schemes for employees particularly in startups has fostered a greater level of interest in accounting information by employees.

Moreover, potential employees are also interested to learn about the financial health of the organization they aspire to join in the future.

External Users of Accounting

External users are the secondary users of accounting.

Following are the 8 types of external users and their information needs:

Investors

Investors need to know how well their investment is performing. Investors primarily rely on the financial statements published by companies to assess the profitability, valuation and risk of their investment.

Investors use accounting information to determine whether an investment is a good fit for their portfolio and whether they should hold, increase or decrease their investment.

Lendors

Lenders use accounting information of borrowers to assess their credit worthiness, i.e. their ability to pay back any loan.

Lenders offer loans and other credit facilities on terms that are based on the assessment of financial health of borrowers.

Good financial health is indicated by the borrower’s ability to pay its liabilities on time, high profitability, substantial securable assets and liquidity.

Poor liquidity, low profitability, lack of assets that can be secured and an inability to pay liabilities on time demonstrate poor financial health of borrowers.

On a lighter note, borrowers can only get a loan from lenders if they can prove that they don’t need the money.

Suppliers

Just like lenders, suppliers need accounting information to assess the credit-worthiness of its customers before offering goods and services on credit.

Some suppliers only have a handful of customers. These customers could be very large businesses themselves. Suppliers need accounting information of its key customers to assess whether their business is in good health which is necessary for sustainable business growth.

Customers

Most consumers don’t care about the financial information of its suppliers.

Industrial consumers however need accounting information about its suppliers in order to assess whether they have the required resources that are necessary for a steady supply of goods or services in the future. Continuity in supply of quality inputs is essential for any business.

Tax Authorities

Tax authorities determine whether a business declared the correct amount of tax in its tax returns.

Occasionally, tax authorities conduct audits of the tax returns filed by businesses in order to verify the information with the underlying accounting records.

Tax authorities also cross reference accounting information of suppliers and consumers in order to identify potential tax evaders.

Government

Government ensures that a company's disclosure of accounting information is in accordance with the regulations that are in place to protect the interest of various stakeholders who rely on such information in forming their decisions.

Government defines and monitors accounting thresholds such as sales revenue and net profit to determine the size of each business for the purpose of ensuring that it complies with the relevant employee, consumer and safety regulations.

Auditors

External auditors examine the financial statements and the underlying accounting record of businesses in order to form an audit opinion.

Investors and other stakeholders rely on the independent opinion of external auditors on the accuracy of financial statements.

Public

General public may also be interested in accounting information of a company. These could include journalists, analysts, academics, activists and individuals with an interest in economic development.