Users of Accounting Information: Internal and External Users!
(i) Internal Users:
Internal users may consist of owners and management.
Owners are the persons who contribute capital in the business and ultimately responsible to bear all risk associated with the business. They are interested in the profitability and solvency of the business concern. In small business enterprises, owners control the affairs of the business directly, but in medium or large enterprises these control are exercised by the managers.
Management may consist of Board of Directors, Managers and other officers of the business enterprise. They need the accounting information on cost of sales, profitability and solvency of the business enterprise for planning, controlling and decision making. Management is interested in assessing the capacity of the business to earn profits in future.
It is responsible for judging the solvency of the enterprise and to meet its debt obligations on time. Through various ratios viz. Debt-Equity Ratio, Current Ratio, etc., management can understand the short term or long term solvency of the business. Similarly, with the help of Cash Flow Statement, the need for short term and long term funds can be known.
Thus, we can say that financial statements are of a great significance for owners and management to know the solvency, profitability and capital structure of the firm.
(ii) External Users:
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.
(a) Investors and Potential Investors:
Investors and potential investors of an enterprise are interested in the prosperity of the business. They want to know the earning capacity of the entity and its future path of growth. Since investors are not always involved in the day to day working of an enterprise, so for investing further capital, they get the information through financial statements.
(b) Lenders and Financial Institutions:
Lenders and financial institutions viz. banks and financing companies are interested to know the short term as well as the long term solvency position of the entity. They analyse the financial statements to assure themselves for the safety of their money and to know whether firm is solvent enough to repay the debts.
(c) Suppliers and Creditors:
Suppliers and Trade Creditors are interested in the financial strength of an entity, so that they can extend credit for goods accordingly. They are always anxious to determine the capability of the company to meet its debts as and when they fall due. For getting all this information, financial statements can be used.
On the basis of accounting information, customers can know the continued existence of the enterprise and continued supply of the products and services rendered by it.
For knowing the relative strengths and weaknesses of their competitors and for strategic purposes, business enterprises examine and analyse the financial statements of other business enterprises, their credit policies and debt collecting procedures. In this connection, business enterprises regularly keep a constant touch with the accounting information of their competitors.
(f) Trade Unions:
The salaries of the employees indirectly depend upon the profits of the enterprise. The amount of bonus to be granted to employees is also fixed after analysing the financial statements. The wealth of the business enterprise is an indication that the positions of employees are stable and chances of growth within the enterprise are bright.
(g) Government and Other Regulators:
On the basis of financial statements, government authorities determine the progress of various industries and the need for financial help. Sometimes government restricts the trade which is using unfair trade practices and charging more prices for essential commodities.
(h) Taxation Authorities:
Various taxes and excise duties are levied by the government after analyzing the financial statements. Taxation authorities viz. Income Tax Department, Sales Tax Department and Customs and Excise etc. analyse the financial statements to make sure that the financial statements are prepared as per the legal provision and that various figures relating to sales and income are correct in order to assess the tax liability of the business enterprise.
Society is that part of business environment in which business enterprise is born and grows. Business enterprise helps the society by protecting environment, generating employment, providing residential accommodation and low cost education to the weaker sections of the society etc. In this connection accounting information helps the society to know the contribution made by the business enterprise for the upliftment of society.
Some other parties may also be interested to analyse the financial statements of an enterprise such as stock exchange authorities, researchers, economists, etc. for various reasons such as determining the price of securities, decisions for buying or selling of securities, knowing the contribution of public or private sector in the gross national product etc.