The basic purpose of accounting is to provide information that is useful to individuals inside the organization and to individuals or groups outside the organization. Accounting is the discipline that provides information based on which external and internal users of information can make decisions that result in the allocation of economic resources in society.
What is Accounting Information? – Video For You
I External Users of Accounting Information
External users are groups or individuals outside the organization for whom the accounting function is performed. The various external users of accounting information may be the following:
1. Investor
People who are interested in investing money in an organization are interested in knowing the financial health of the organization to know how safe is the investment already made and how safe will be their proposed investment. To know the financial position, they require accounting information which will help them to evaluate the past performance and prospects of the organization. Thus, investors rely on the accounting information included in the financial statements for their investment decisions. They can know the profitability and financial position of the organization in which they are interested in investing by studying the accounting information given in the financial statements of the organization.
2. Creditor
Lenders (i.e. suppliers of goods and services on loan, bankers, and other lenders of money) want to know the financial position of the concern before extending or lending a loan. They want to ensure that the institution will not experience difficulty in making timely payments i.e. the liquid position of the institution is satisfactory. To know the liquid position, they require accounting information relating to current assets, quick assets, and current liabilities which are available in the financial statements.
3. Members of non-profit organizations
Members of non-profit organizations such as schools, colleges, hospitals, clubs, charitable institutions, etc., require accounting information to know how their contributed funds are being used and to ensure that Whether the organization deserves continued support or support should be withdrawn keeping this in mind. Poor performance is reflected by accounting information and transferred to another organization. In judging the performance of such organizations, the criterion would not be the profit earned, but the main criterion would be the service rendered to society.
4. Government
Central and state governments are interested in accounting information because they want to know the earnings or sales for a particular period for purposes of taxation. Income tax returns are examples of financial reports that are prepared from information taken directly from accounting records. Governments also need accounting information to compile statistics related to business, which, in turn, helps compile national accounts.
5. Consumer
Consumers need accounting information to establish good accounting controls to reduce the cost of production as well as reduce the prices of the goods they buy. Sometimes, the prices of certain items are fixed by the government, so it needs accounting information to fix fair prices so that consumers and manufacturers are not exploited. The prices are fixed keeping in view the reasonable return to the manufacturers on investment shown in the accounting records.
6. Researcher
Accounting information, being a mirror of the financial performance of a business organization, is highly valuable to research scholars who wish to study the financial operations of a particular firm. To study the financial operations of a particular firm, the researcher needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities, and shareholders. Funds are available in the accounting records maintained by the firm.
II Internal users of accounting information.
Internal users of accounting information are individuals or groups that are within the organization. Following are such internal users.
1. owner
Owners provide money to run a business and they want to know whether their money is being used properly. They require accounting information to know the profitability and financial position of the entity in which they have invested their money. Financial statements prepared periodically from accounting records reflect the profitability and financial position.
2. Management
Management is the art of getting things done through others, Management must ensure that the subordinates are doing the work properly. Accounting information is an assistant in this regard as it helps the manager to evaluate the performance of the subordinates. The actual performance of the employees can be compared with the budgeted performance that they were expected to achieve and remedial action can be taken if the actual performance is not good. Thus, accounting information provides “eyes and ears to management”.
The most important functions of management are planning and controlling. The preparation of various budgets, such as sales budget, production budget, cash budget, capital expenditure budget, etc., is an important part of the planning function and the starting point for budget preparation is the accounting information of the previous year. Controlling is the act of seeing that the programs laid down in various budgets are being achieved i.e. the actual performance as ascertained from accounting is compared with the budgeted performance, thereby helping the manager to control in case of underperformance. Accounting information is also helpful to management in determining a fair selling price. In a competitive economy, the price should be based on a reasonable rate of cost and return. If a firm quotes a price that is higher than the cost plus a reasonable rate of return, it will probably not get the order. On the other hand, if the firm quotes a price below its cost, the order will be placed, but it will suffer losses as the price is below cost. Therefore, the selling price should always be fixed based on accounting data to obtain a proper margin of profit on sales.
3. Staff
Employees are interested in the financial condition of the company they serve, especially since the payment of bonuses depends on the size of the profit earned. They want accounting information to verify that the bonus paid to them is correct.
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