Accounting information is crucial for any business or financial entity. Based on this information, better investment and business related decisions are made.
In this article, we will be discussing different users of accounting information.
Table of Contents
What is accounting information?
Accounting information is used by various regulatory agencies, financial institutions, and tax authorities, among other creditors, for both internal and external purposes. It includes financial statements that are generated via bookkeeping and accounting.
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This information records and tracks the accounting activity of a business by using information technology systems and resources. It is fed into an accounting information system that uses a computer system for processing data. Mainly, there are three types of accounting information, including the following:
- Management accounting: This information is used for internal purposes to make managerial decisions. Management accounting information helps in planning, controlling and decision-making for the firms.
- Cost accounting: Cost accounting information is useful in deciding on cost and assessing where cost-cutting is possible.
- Financial accounting: Financial statements such as balance sheet, income statements, cash flow statements, P/L statements are the part of financial accounting information. This information is used for determining the financial health of the company during an accounting period.
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Types of Users of Accounting Information
There are two main users of accounting information. These include internal and external users. Let us discuss each of them in detail.
1. Internal Users
They are involved in the day-to-day operations of the business as well as long-term strategic planning. These professionals help in making decisions related to purchasing inventory, managing supply, and deciding prices. These are the primary users of accounting that are further subcategorized into three types.
These accounting information users use this information to assess how their business is going and what is the level of risk involved in it. They use accounting information to determine the level of stability in the business over years and the impact of economic factors on business.
Financial statements help them in understanding the profitability of the overall business and products. By wisely using this information, they can decide whether they should invest in a business or if they should use resources in other areas.
They use financial information to prepare and review financial reports such as the financial statements. They also need to review the accounting information in the annual report to gain a better understanding of the business. Using accounting information, they can also assess how their company is performing.
Managers plan, monitor and make decisions that are relevant for the business. They allocate resources to appropriate business activity to provide for the needs of business. These users of accounting information monitor the performance of business by comparing against past informations, KPI, industry benchmark and competitor analysis. These professionals use information of accounting to make decisions related to financing, investing and pricing.
2. External users
They have varying interests for which they are categorised as users of accounting information. There are different external accounting information users. Let us discuss these users.
2.1 Tax authorities
These bodies use business information to determine whether the amount of tax declared by the business in its tax returns is correct. They also use this information to determine the tax liabilities of an enterprise. To verify the information filed on tax returns, these authorities audit returns, accounting records of customers and suppliers to prevent tax evasion.
The apex governing body is one of the main users of accounting information. The use of this information is based on the regulations that are meant to protect the interest of stakeholders who use this information to make decisions. They can use this information to monitor the economy.
Using this information also helps them in monitoring and setting accounting thresholds to determine the business size. This helps the government ensure whether the business is complying with relevant regulations or not.
Also known as lenders, these people use accounting information to decide whether they should offer credit to the company. They also decide if there is any need to restrict credit flow to the company based on the assessment of accounting information. Through this information, they can assess whether the company is capable of repaying them.
If the company has been able to pay off its liabilities on time, then it indicates the good financial health of the company, its securable assets and high profitability. In case, the company lacks assets, has poor liquidity and is unable to pay liabilities on time; it indicates that the company’s financial health is not good enough.
These people use accounting information to determine the credit-worthiness of the customers. Based on this assessment, they decide whether they should offer goods and services on credit to its customers. These users of accounting information indirectly assess the financial health of the business based on its customers.
These finance professionals audit the financial statements and accounting records. Their assessment of the accounting information is used by third parties and investors who need to know the actual financial status of the company. Since auditors provide an unbiased opinion through their reports, their reports are mostly accurate.
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