The accounting cycle process provides invaluable financial information in the form of financial statements for a broad range of individuals to use as they see fit. However, although many business owners understand the usefulness of this financial information, only some know who uses the statements produced.
Below, we’ll explore who uses accounting information. Then, we’ll explore the external and internal users who hold a stake in the accounting information produced in various ways.
Why does a business need accounting information?
Accounting information helps a business thrive by tracking expenditures and income, remaining compliant, and providing investors with key information surrounding the company’s health. Three key financial statements get generated by accounting information:
- The income statement explains profit and loss
- The balance sheet, which gives a whole picture of the company’s financial position
- The cash flow statement and cash receipt books bridges the gap between the income statement and the balance sheet
These statements are the bulk of the financial data which help internal users continue to make the best decisions surrounding the growth of the company. An external user, such as trading partners, would use such financial reports for investment decisions.
Who uses accounting information?
Internal and external users use the financial information produced by a company for different reasons. But first, let’s explain what these groups are.
External users include groups of individuals who fall into one of these categories: investors, creditors, suppliers, government agencies, the public, and customers. Internal users come in the form of managers, business owners, directors, stockholders, internal auditors, and employees.
Internal users of accounting information
Owners and stockholders
Owners refer to titleholders of the organization or institution. These individuals are direct investors in the business through single-owned entities or partnerships and are the primary users of this information. Their need for on-time and accurate accounting information is crucial to making an important business decision that could decide the company’s future.
Stockholders are those who have some interest in the success of the company. Investors and creditors are a good example, but even the local community could represent stakeholders, all of whom are internal users. An example would be a large factory providing jobs to thousands within a local community, and if it were to fail, it would have a significant impact on the population.
Directors, managers, company officials
Everyone within this group works directly within the company and has a stake in its success. This group includes all directors, such as the CEO, COO, and VPs, who must make important decisions concerning the company’s finances. By their very definition, these are all internal users of accounting and other departments.
Internal departments, employees
Internal departments and employees consist of everyone who works in the company. Though they may not see the financials for themselves all of the time, they have a stake in the company’s success. As such, it’s important to them that those who need to make decisions get that information on time.
Internal auditors have a large stake in receiving financial information in a timely fashion. Therefore, the function of internal auditors is to ensure that all financial statements are presented correctly and remain compliant.
External users of accounting information
Creditors include lenders who use accounting information to determine whether a company has the ability to repay a potential loan. They review the information to check income along with other potential liabilities of the company as a borrower.
Investors provide the capital needed for the company to start and continue functioning. Before someone decides to invest any amount of capital into a company, they have an obligation to review all financial documents produced by the company and see if their investment is secure.
One of the biggest financial statement users is the government—as a way to determine if a company complies with all rules and regulations. Financial statements serve as a window into the company allowing government regulatory agencies to monitor the economy and market. These government regulatory agencies are strictly a part of the government, rather than outside regulatory agencies discussed later.
These parties include individuals or companies who do business with the company producing the financial statement. When signing a contract with a second company, financial statements become a key aspect of deciding which company to work for.
Various government bodies work as regulatory agencies to determine whether companies comply with all regulations. These regulatory agencies can exact fines if they find things are not done as they should be regarding financial statements.
International standardization agencies
Aside from the United States government’s regulations, international standardization agencies also have their own that companies need to keep in mind. This is especially important in such a global economy where many companies conduct business outside United States borders.
Although this group might not be the first to spring to mind, journalists also have their own stake in companies’ accounting information. Journalists monitor the economy and report on their findings, getting the most vital information from financial statements.
Frequently asked questions
Internal and external users use accounting information under various circumstances. These divide further into these categories:
International standardized agencies
Owners and stockholders
Directors, managers, and other company officials
Internal departments and employees
A company needs financial accounting information for various reasons, but mainly to ensure the company’s financial health remains intact. Accounting information gives insight into the profit and loss the company has seen throughout a certain time frame and discloses that information to internal and external users of accounting information.
Owners, as internal users, often wonder who uses financial accounting information when they work to generate new financial statements. In truth, many different groups use financial information and statements to make important decisions regarding a company’s financial health. These statements should also reflect the full truth of the accounting practices within the company within a specific time frame.
External and internal users have a stake in the financial information generated by a company. These users use the financial statements in different ways, but most of the time, it’s to determine whether to invest, provide credit, or make decisions about regulatory compliance. Some of these users include individuals such as owners and directors or agencies such as government regulatory bodies and international standardized agencies, which are considered external users.
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.
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