The government bodies especially the authorities of the income tax department are interested in the financial position of the business for taxation and other regulatory purposes. Every company is required to pay taxes at a certain percentage to the government authorities. So the amount of taxes payable is calculated after the preparation of financial statements. Suppliers rely on financial information to sustain their business relationships. Since suppliers sell mostly on credit, they want to know about their customers’ total outstanding accounts payable as reported in the balance sheet and evaluate each customer’s ability to pay its bills on time.
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. This includes analysts, researchers, students, media reporters, and publishers. They are interested in financial information about the company for educational, scholarly, and other non-commercial purposes. In the United States, the dollar is used as the standard measurement basis. Measuring financial performance in monetary terms allows managers to compare the organization’s performance to previous periods, to expectations, and to other organizations or industry standards. A credit rating agency will need to review the financial statements in order to give a credit rating to the company as a whole or to its securities.
Qualitative characteristics of accounting information such as identifying, measuring, recording and classifying financial transactions help businesses with decision making, analysis, target setting, budgeting, pricing, forecasts, etc. On the other hand, external reporting involves preparing financial information to be distributed to parties outside the organization. Unlike internal reports, external reports do not contain confidential information about the company. Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition. Assume you are an investor and are looking at two companies – Company A and Company B. Suppose you have $50,000 and are planning to invest your money to receive annual returns from share in profits.
- Outside analysts want to see financial statements in order to decide whether they should recommend the company’s securities to their clients.
- Banks and lenders are dependent on the information that is in the financial statements and other financial documents that the company provides during a loan application.
- Accounting is the language of business, it brings life to the otherwise lifeless business activities.
- Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.
- 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.
The net income from the income statement corroborates with the amount of earnings available to shareholders for retention. Government agencies, including regulatory bodies and taxing authorities, also use financial statements to monitor the financial conditions of the companies they have jurisdiction over. For example, the government may require companies in certain industries to meet mandatory capital injections as measured against total risky business investments a company may undertake. In this case, financial statements are very useful in revealing such capital-to-assets risk ratios based on information from the asset and equity sections of the balance sheet. For tax purposes, companies should report accurately in their income statement about tax-deductible expenses and any losses they can use against future earnings to receive tax write-offs from taxing authority. Make certain that the information that investors, suppliers, and government agencies look for in your company’s financial statements is available, correct, and appropriate for their consumption.
Who are the external users of accounting information?
Information gathered may also be used in determining the extent of credit to be allowed, credit period, and other credit policies to be applied. Since the internal financial reports are not available publicly, the company is not required to follow the Generally Accepted Accounting Principles (GAAP) when preparing the reports. For example, when preparing the sales report for the past six months, the management may require the accountant to include all transactions such as discounts, returns, and other line items that affect the net sales value. Generally, internal financial reports cover different subjects, such as sales, marketing, human resource, etc. They will do so by reviewing the company’s financial statements and making an investment decision. Understanding these financial statements can help employees feel more secure, involved, and invested in their workplace.
To help make all these decisions effectively, accounting information is necessary. Individuals make use of accounting information in the day-to-day affairs of managing their cash and bank balances, making investments, or deciding on whether to buy or lease a car or home. Since then she has written additional books as well as screenplays, website content and e-books. Rosehill holds a Master of Business Administration from Arizona State University. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Unit 1: What is Accounting
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). Existing laws require public companies to publish a complete set of audited financial statements at the end of each financial year. It is done to meet the informational requirements of the different interested parties such as investors, analysts, regulators, etc. as well as discharge the accountability duty of the organization.
2 Identify Users of Accounting Information and How They Apply Information
They are nonetheless especially interested in the company’s liquidity – its ability to pay short-term obligations. It is clear that the objective of accounting is to provide information to users for decision-making. Even the customers are interested in the financial statements of the company from which they are purchasing the materials that is important for running their business. Generally, the big companies are interested in doing business with the parties who can supply goods for long period so before entering into contract they analyse the stability of the company. Also, the customers go for the companies that can give them credit period which also they analyse from the financial statements. The lenders are the ones who lend money to companies such as financial institutions including banks and NBFCs.
This department assists management in making business decisions in a variety of ways by providing interim accounting information. When planning, making decisions, implementing plans, formulating travel agency accounting policies, and performing other functions, they use various accounting information from financial statements. The business is run by the board of directors, which the company’s shareholders elect.