Accounting information of a business enterprise is used by many stakeholders. Different parties use this information for different purposes depending on their needs. Therefore, the accounting information system of a business enterprise must be designed in a way that can generate the reports to satisfy the information needs of every interested party.
We can broadly divide the users of accounting information into two groups – internal users and external users. Internal users include managers and owners of the business whereas external users include investors, creditors of funds, suppliers of goods, government agencies, general public, customers and employees.
Internal users use a mix of management and financial accounting information. Some internal users of accounting information and their needs are briefly discussed below:
Management uses accounting information for evaluating and analyzing organization’s financial performance and financial position, for taking important decisions and appropriate actions to improve business performance in terms of profitability, financial position and cash flows. As many popular management accounting books make clear, one of the major roles of management is to set rules and procedures to achieve organizational goals. For this purpose, management uses information generated by financial as well as managerial accounting system of the organization.
Owners invest capital to start and run business with the primary objective to earn profit. They need accurate financial information to know what they have earned or lost during a particular period of time. On the basis of accounting information they decide their future course of actions such as expansion or contraction of business.
In small businesses (like sole proprietorship and partnership) owners themselves perform the function of management.
External users normally use only financial accounting information. Some external users of accounting information and their needs are briefly discussed below:
In corporate form of business, the ownership is often separated from the management. Normally investors provide capital and management runs the business of the entity.
The accounting information is used by both actual and potential investors. Actual investors use this information to know how their funds are being used by the management and what is the expected performance of business in future in terms of profitability and growth. On the basis of this information, they decide whether to increase or decrease their investment in future. Potential investors use accounting information to decide whether or not a particular corporation is suitable for their investment needs.
Lenders are individuals or financial institutions that normally lend money to businesses and earn interest income on it. They need accounting information to assess both financial performance and financial position of the business, and to have a reasonable assurance that the entity to whom they are going to lend money would be able to return their principal amount as well as pay interest thereon.
Suppliers are business individuals or organizations that normally sell merchandise or raw materials to other businesses on credit. They use accounting information to get an idea about the future creditworthiness of the business and to decide whether or not to continue providing goods on credit.
4. Government agencies
Government agencies use financial information of businesses for the purpose of imposing taxes and regulations.
5. General public
General public also uses accounting information of business organizations. For example, accounting information is:
- a source of education for students of accounting and finance.
- a source of valuable data for those researching about organizational impact on individuals and economy as a whole.
- a source of information for the people looking for job opportunities.
- a source of information about the future of a particular enterprise.
Accounting information provides important information to customers about current position of a business organization and to make a judgment about its future. Customers can be divided into three groups – manufactures or producers at various stages of production, wholesalers & retailers, and end users or final consumers.
Manufacturers or producers at any stage of processing need assurance that the organization in question will continue providing inputs such as raw materials, parts, components and support etc. The wholesalers and retailers must be assured of consistent supply of merchandise inventory. The end users or final consumers are interested in continuous availability of products and related accessories. Because of these reasons, the accounting information is of significant importance for all three types of customers.
Employees who do not have a hand in core management of the business are considered external users of accounting information. They are interested in financial information because their present and future is tied up with the success or failure of the business. The success and profitability of business ensure job security, better remuneration, job promotion and retirement benefits.