Accounting subject matter provides information about the financial resources, obligations and activities of an enterprise that is intended for use by a wide range of community in the society – financial concerns, shareholders, management, employees, trade, unions, creditors, suppliers, costumers, government information, regulatory, agencies, tax authority and even any conscious citizen of the country, some of them are external to the organization and some are internal, both internal and external users rely on accounting info to make better decisions in pursuing their goals, the users group of system can be classified into two broad sections:
Fig: Users of accounting massage – users and uses
User of accountancy can be classified in the following ways also:
|Existence in business view||Interest on business view|
|External users (Outside business)||Internal users (inside business)||Direct users (Having direct interest in business)||Indirect users (having indirect interest in Business)|
|Tax Authority||Tax Authority|
|Regulatory Agency||Labor unions|
Fig: Users of accounting information in specific
We discuss the accounting information needs of users under the following two broad sections:
- Internal Users Group:
Internal users of accounting information are those individuals directly involved in managing and operating an organization. They include managers, employees and other important internal decision makers. They need accounting information to make strategic and operating decision. Managerial accounting is the area of accounting aimed at servicing the decision making needs of internal users. Managerial accounting provides internal reports (cost statement, budget, sales forecasts, production report and so on) to this group for improving effectiveness and efficiency of organizational activities. Internal reports helps to answer question like:
- What are manufacturing cost per product?
- What is the most profitable mix of services?
- What level of sales is necessary to brake-even?
- Which service activities are most profitable?
- What costs vary with sales?
We briefly discuss the information needs of internal users in the following section:
a) Information needs of management:
There are at least seven functions common to most organizations. Accounting is essential to the smooth functioning of each of these functions. Accounting information is necessary to make operating decisions at the following functional levels:
Marketing Managers user accounting reports about sales and cost to effectively target customers and set prices. Marketing also user accounting to monitor consumer needs, tastes and price concerns.
II. Human Resource:
Human resource managers aim to locate, screen, hire train, compensate, promote and counsel employees. Managers need information about current and potential employees, payroll costs employee benefits and other performance and compensation data.
Accounting Information Managers at this level need to know what, when and how much to purchase raw materials.
Distribution involves timely and accurate delivery of products and services Relevant information is often a key to quality, low cost distribution.
Good production methods depend on information to monitor costs and ensure quality.
VI. Research and development:
Research and development is aimed at creating or improve a company’s products and services. managers need information about current and projected cost and sales to decide on research and development projects.
Servicing customers after selling products or services is often key to success and includes training assistance, installation, warranties and maintenance. Information is needed on both the costs and benefits of servicing.
Note to the readers:
|Although management is internal users of accounting information, they can and they, in many cases, do use information provided by financial accounting, which is basically intended to report to the external users.|
Most importantly, success and survival in a though, competitive business environment require that management concentrate much of its effort on three major goals: Profitability, liquidity and solvency. Profitability is the ability to make profit sufficient to attract and hold investment capital. Liquidity refers to the ability to meet short-term obligations. Solvency refers to the ability to meet long-term obligations. Successful managers consistently make the right decisions on the basis of timely and valid information.
Again, management, as a steward of resources, always be accountable to the shareholders (owner of resources). This drives the management to make decisions effectively, perform better and in doing so, accounting information plays a vital role.
- Cash at bank
- Estimated profit for new year
- Estimated revenue for the next year
- Present income/loss
- Forecasts of cash needs &
- Other information relating to cost control, budget preparation, credit control, new sales campaign, business explanation, comparison of financial alternatives and so on.
Fig: Information needs of internal users
b) Information needs of employees:
Employees are also the internal users of accounting and they have direct interest in the organizational activities. it is expected that there should be symmetry of treatment between shareholders, management and employees in respect of the accounting, which each of them requires and receives. Information make them aware of compensation packages, fringe benefits, jobs security and other issues related with their career.
c) Trade unions:
Trade or labor unions can better strive for the employees’ benefits with the management bodies. Accounting will keep them well-informed of such issues.
Straight from practice – Verizon Wireless
Verizon Wireless Legally Known as Cellco is an American Communication Company and it is a globally recognized telecommunication company. This company operated in hole over United states. It is a private company, its external uses of account are not that significant as like a public limited company. But account information is significantly used for internal purposes. Finance division is vested with the responsibility of generating and presenting accounts data to board of directors. This division collects goal, strategy and budget of each division every month and reports them as a summary (internal report) to the TM international Limited.They then compare the budgeted targets with the actual performance. The division users accounting software ‘AccPacc” to generated such information. there is an internal audit division, which is constantly watching the accuracy of accounting data.
2. External users group:
External users of accounts data are those who are not directly involved in running the organization. They include shareholders. Creditors, customers and other important parties. Yet these users are affected by, and sometimes affect the organization.
|Note to the readers:|
|❶ External users have limited access to organization’s valuable information unlike internal users.
❷ We user the term ‘general-purpose financial statements’. Financial statement that are reported to the external users. They are for general purpose because they are to serve external users of diversified interested not common.
We briefly discuss the information needs of external users in the following section:
a) Information needs of creditors:
We define as creditors all those who have provided goods, money or services to business organization and have accepted a delay in payment or repayment. creditors maybe short term or long-term lenders. Creditors include trade creditors, blank insurance, leasing companies and so on. Creditors include trade interested in two issue; periodic interest and repayment of loan at future date. System data helps them to answer questions about organizations like:
- Has it promptly paid past loans?
- What are it current risks?
- Can it repay current loans?
- What is its profit outlook?
They look at the profitability, liquidity and solvency solution of the organization.
b) Information needs of shareholders (Stockholders):
Shareholders are the true owners of a company, They are also termed as investor or stockholders. They invest capital in the business. Do generally they are interested to know how the business performs and what the end result is at the end of the day. To be specific, Their main concern is periodic return (dividends) and appreciation in share price in the market. many businesses do not give back all of their profits to the shareholders rather a part of it and invest the rest in more assets to enable the company’s future growth. System helps them to make question like?
- What is the income for current and past periods?
- Are assets adequate to meet business plan?
- Do expensive fit the level and type of sales?
- Are customers ‘bills paid promptly?
- Do loans seem large or unusual?
c) Information need of customers:
Customers have become more curious about the financing and profits of corporations as well as the effects that corporations have on inflation, the environment, social problems and the quality of life. Certainly, customers are interested in information indicating the fairness of pricing policies, such as the relative proportion unit price, which consists of costs, profits and texes and in the differential costs between a product and another produced by the same firm at a different price.
d) Information needs of regulators:
Regulator’s may include securities and Exchange omission (SEC), Registrar of joint stock companies, stock exchanges, tax authority and so on. Public limited companies are required to report to these regulators. They watch an eye to the operation of the companies and try to ensure public interest. Hence they need to relay on accounting information.
|Users||Uses||Accounting Info||Financial Statements|
|Shareholders/ owners||● Value of Investment||→ Value of share price||Income Statement|
|● Profitability and dividend||→ Proposed dividend and/ or dividend paid||Cash Flow Statement|
|B.O.D/ management||● Overall Performance||→ Gross and net profit figure||Income Statement|
|− Profitability||→ Cash position||Balance Sheet|
|− Liquidity||→ value of assets & liabilities||Cash Flow Statement|
|Note to accounts|
|− Future Prospect||Fund, welfare fund, and group insurance|
|→ Provident found gratuity|
|→ Liability and asset position etc|
|Creditors||● Solvency and liquidity||→ Cash availability||Cash Flow Statement|
|Tax authorities||● Amount of tax and VAT||→ Net profit and amount of tax and VAT duty paid||Income Statement|
|Value Added Statement|
|Regulatory agencies like SEC DSE etc||● Compliance with existing laws and bylaws||→ Proper audit||Audit report|
|→ Election of directors annual general meeting properly held etc||Details of annual report|
|Customers||● Product/service quality||→ Pricing (Sales price/service revenue)||Income Statement|
|● Business ethics||− fairness|
|● Social responsibility||→ Profit made by the company – fairness|
|Economic Planners||● Planning and forecasting economic activities||→ Production, tax, dividend, income, investment employment||Details of annual report including financial statements.|
Fig: Users and uses of accounting information
e) information needs of external auditors:
External auditors examine the financial statement of an organization and give a reasonable opinion as to the fairness of financial information. They are independent persons and need to be qualified chartered accountants. As compared to other external users, they usually enjoy much more access to organization’s information. External auditors are import as they are expected to upkeep the best interest of the shareholders (owners).
f) Information needs of government :
The government’s wishing to take a more active part in planning and forecasting economic activity has led to greater use of accounting. A system called national income accounting has been developed for the whole economy. It deals with the total production. inventories, income, dividends, taxes and so forth of out country.
g) Information needs of other external users:
Accounting serves the needs of many other external users. Voters, legislators and elected officials use accounting information to monitor and evaluate a government’s receptions and expenses. contributors to non profit organizations use accounting information to evaluate the use and impact of their donations. suppliers use accounting information to judge the soundness of a business before making sales on credit. Even any conscious citizen of the country can use accounting information in case of listed public limited companies.