Users of accounting information

Financial accounting is primarily concerned with preparation of accounting information for the outsiders who do not have direct excess to the accounting records. They obtain accounting information of business enterprises from their annual reports, data published by Government departments and information published in financial newspapers, e.g., the Economic Times, Financial Express etc., or business magazines e.g., Business India, Business World, The Economist, etc. In the following paragraphs, the users of accounting information have been grouped into a number of major headings and the requirements for each considered therein:

Creditor and short-term lenders : Creditors include suppliers of goods and services on credit. Short-term such as commercial banks supply money for short period to business organizations. Bankers and suppliers inspect the accounting information before making loans or granting credit.They want to know whether or not the enterprise will be able to meet its financial repayment obligations in time. Their specific interest lies in solvency, liquidity and profitability positions of the business enterprise. Accounting serves their purpose by disclosing true and fair view of current assets in the balance sheet and profitability position in the income statement so as to assure the creditors and lenders that their debts would be paid in time.

Investors : Under this category are included the existing shareholders and future shareholders. Basically they will be interested in the dividends that are paid. They are also interested about the future prosperity of their enterprise. But the income statement and the balance sheet of one year will not be helpful to guide the investors about the future prospects. So the accounting information must provide the details of the profits and financial position of business so that the investors can find out the progress of the past few years and it may be assumed that this progress will be maintained in future as well. At present such information is generally given in the published accounts. The statement of the chairman in the annual reports also provides some indication about the future progress.

Long-term lenders : This category of users include debenture holders and those providing long-term loans, say; industrial banks, financial institutions, etc. They are interested in knowing that they will get the interest due to them and that the same will be paid when it is due and payable. They will also see to it that their principal amount is also paid on due date. So their main interest is in the profitability for interest payments and liquidity for the repayment of the loan amount. The availability of cash flow statements in addition to income statement and balance sheet has considerably helped users to evaluate the liquidity position of a business enterprise.

Management : The owners are not the only persons within the business enterprise who are interested in various aspects of the operations of a business. With the separation of management and ownership(particularly in a limited company), the managers are responsible for carrying on the operationsof thebusiness enterprises. The type of accounting information needed by managers may vary with the size of the enterprise. The manager of a small business may need relatively little accounting information. As the business enterprises grows in size, the manager loses direct contact with daily operations. As a result, information about the various aspects of the business enterprise must be supplied by accounting. Some of their needs for accounting information relate to: (i) setting objectives or targets for future periods and devising methods to attain those objectives; (ii) observing and measuring the performance of the various departments of the business as also the enterprise as a whole; (iii) evaluating the performance in relation to the targets set up; highlighting the deviations from the planned targets; and (iv) taking such corrective action as may be necessary to overcome the shortfalls.

Employees (Labour unions) : In .this category are included both individual employees and groups of them represented by labour unions. Employees want more salary and other benefits such as overtime payments, bonus, housing, medical facilities and so on. The bargaining power of the unions is increased if workers’ demands are based on facts and figures. In addition, some companies regularly issue certain reports containing financial information about the employers for a better understanding of the business by the employees. These reports highlight what the companies are doing for the welfare of their employees and what they intend to do in future.

Government and regulatory agencies : In recent years, the government has become one of the most important users of accounting information. The central, state and local governments have the responsibility of allocating the resources for different uses. Naturally they are interested in the activities of business enterprises such as sales, profits, dividend policies, investments, etc. Moreover, the Government activities are financed through the collection of tax. Thus, the accounting information about business activities is very helpful in the collection of income tax, excise duties, custom’s duties, sales tax, etc. Each tax requires a special tax return based on necessary accounting information of various business enterprises. Any distortion in the accounting information needed by the Government agencies would adversely affect the welfare policies of various types of governments. Similarly a number of regulatory agencies like Securities and Exchange Board of India (SEBI), the Insurance Regulatory Authority, the Reserve Bank of India etc., need accounting information for the efficient operation of capital markets.

Individuals and society : People arc affected by the operations of a business enterprise in their localities. They want to know through the accounting information the trends in the prosperity of the enterprise and also the range of activities. This would enable them to assess the employment opportunities in their local areas. Society as a whole is concerned with the environment pollution. The accounting information would disclose how much money has been allocated to control such pollution. This has come to be known as social responsibility accounting.

6 thoughts on “Users of accounting information”

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