Users of Accounting Information External & Internal Users
When the financial reports show a decline in a specific department’s productivity despite receiving increased funding, the management may use the internal report to reorganize the department. Also, management can use the employee reports to encourage whistleblowing activities, where employees report activities that violate company policies. Anyone outside the company who do not participate in the day-to-day operations of the business and makes use of the company’s financial information is considered an external user.
- The public is interested in accounting information because this informs them about the financial health of individual businesses.
- The information will help the management to distinguish between the credit customers who are paying credit on time and the credit customers who have delayed or defaulted on credit payments.
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Current investors also want to track the performance of their investments to be able to decide whether to hold on to such investment or look for more promising ones. External financial reporting is a business practice that involves providing financial information on a periodic basis to potential investors and shareholders. The reports are primarily financial statements and other related information about the company that investors require to make an investment decision.
Who are the external users of accounting information?
Employees want to know if the company has the ability to pay remuneration and benefits. Labor unions review the financial performance and condition of the company before making demands on salary increase, employment benefits, and other labor matters. Customers are more likely to have an interest in a company’s financial statements when they rely upon the goods and services provided by the firm.
In fact, a single company may be reporting to several state and local governments and even to foreign governments, depending on where they are doing business. Internal users are owners and managers involved in the day-to-day operations of the business and in long-term strategic planning. They are the ones who are making decisions such as whether to lease or buy equipment or to keep the old equipment and simply keep repairing it. They also decide what products or services to produce and how much of each to supply.
Accounting supplies managers and owners with significant financial data that is useful for decision making. This type of accounting is generally referred to as managerial accounting. External auditors examine the financial statements and the underlying accounting record of businesses in order to form an audit opinion.
Government Regulatory Agencies
In this connection, business enterprises regularly keep a constant touch with the accounting information of their competitors. Employees are interested in accounting information because their salary appraisals, bonuses, why the xero app marketplace is so important and other monetary and non-monetary benefits are attached to the company’s financial position. Non-managerial employees form part of the operations of the company but do not participate in decision-making.
They will continue to have an interest in the information over time, in order to decide whether their loaned funds are at risk. If so, these analysts need the firm’s financial information as part of their examination of whether the organization would be a good investment for their clients. Lenders – Banks and Non-banking financial companies which provide loans in the form of cash or credit are termed as lenders. External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information. Internal users (primary users) – If a user of the information is part of the business itself then he/she is considered as one of the internal or primary users of accounting information.
Government agencies that track and use taxes are interested in the financial story of a business. They want to know whether the business is paying taxes according to current tax laws. The language in which tax-related financial statements are prepared is called IRC or Internal Revenue Code. Accountants provide information that helps government departments conduct their watchdog functions over business units. For example, it is the responsibility of the income tax department to monitor and audit tax compliance.
As you’ve learned, managerial accounting information is different from financial accounting information in several respects. External users have limited authority, ability and means to access the required information. They have to rely on the financial statements and annual reports, auditor’s report and directors’ report etc. To obtain updated performance reports and decisions of the board of directors, external users can access the websites of companies.
Information based on judgments, estimates, and approximations may not be entirely accurate, but it should still be reliable. Relevant information provides feedback on past actions that helps confirm or adjust current expectations. Normally, relevant information provides both feedback and predictive value simultaneously. It is crucial for the information provided in financial statements to be easily understood by the users.
If the company decided to eliminate the printers, then it would also lose the cartridge sales. In the past, in some cases, the elimination of one component, such as printers, led to customers switching to a different producer for its computers and other peripheral hardware. In the end, an organization needs to consider both the financial and nonfinancial aspects of a decision, and sometimes the effects are not intuitively obvious at the time of the decision. Figure 1.3 offers an overview of some of the differences between financial and managerial accounting.
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Financial information is important for an investor to ensure the investment is secure. Creditors and Investors are the most regular example of external users among many other external users. Comparability allows users to identify similarities and differences in economic phenomena, as these differences and similarities should not be obscured by non-comparable accounting methods.
They decide on the price to charge to customers, and they want to know how much it costs to make a product. Accountants must be adaptable and flexible in their ability to generate the necessary information for management decision-making. For example, information derived from a computerized accounting system is often the starting point for obtaining managerial accounting information. But accountants must also be able to extract information from other sources (internal and external) and analyze the data using mathematical, formula-driven software (such as Microsoft Excel). Suppliers who are being asked by the firm to supply credit will likely want to delve into the company’s financial statements and historical payment patterns in order to arrive at a maximum amount of allowable credit.
The information is made publicly available to investors who require the latest financial information for a specific company listed in a public stock exchange. Industrial consumers however need accounting information about its suppliers in order to assess whether they have the required resources that are necessary for a steady supply of goods or services in the future. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
External users are creditors, investors, government, trading partners, regulatory agencies, international standardization agencies, journalists and internal users are owners, directors, managers, and employees of the company. Potential investors are interested in the past performance of a business and its potential for future earnings. The financial statements of a company summarizes historical information on performance, financial position, and business activities. These sets of information are vital in assessing profitable investments.