Every organization has to prepare financial statements that include Income statement & Balance Sheet to know the profitability and the financial position of the business respectively over a period of time. These statements are used by various individuals & entities to evaluate the financial performance of the business and take the decisions based on these evaluations where the users can be internal users or external users.
The users of accounting information require the necessary financial information related to the business to know the earnings and financial position of the business which thereby helps the users to take relevant decisions. The users of accounting are broadly classified into 2 categories namely a) internal users b) external users where the internal users are the ones that are directly connected to the organization and are responsible for the operations & management of the business such as Top level management, sole proprietors, partners, managers etc. whereas the external users are the ones that are not directly related to the business and all the other users except the management of the business comes under the external users such as shareholders, Investors, creditors , lenders etc.
Users of financial statements
The different users of the financial statements are:
Internal users of financial statements
The management is required to take various business decisions for the growth & survival of the business and for that management needs both published and unpublished information so that the future plans can be made for better conduct of the business. Management is also responsible for the day to day functioning & operations of the business. They require information related to the cost of the product, selling price of the product, earnings of the business and overall financial position.
Following are the various uses of accounting information for the management:
• Making evaluation by comparing the accounting information internally i.e. comparing figures related to past years with that of current year and externally i.e. comparison of the business financial position with that of the competitors.
• Taking corrective actions based on the accounting information.
• To ensure that the adequate return is generated from the money invested in the business.
• To ensure that the business enterprise is able to pay off its debt well on time.
The various individuals included in management are Chief executive officer, Executive directors, sole proprietors, partners, managers etc.
External users of financial statements
The different external users of the financial statements are:
The shareholders are the owners of the company so they are concerned with the regularity of adequate return on the amount of capital invested by them. Therefore, they need financial statements to know the earnings of the company and to analyze the financial position of the company. Moreover, they need financial information to decide whether to sell the shares of the company if the adequate return is not generated or to buy more shares if they think company will grow and may provide good return in near future.
The lenders include bankers & financial institutions who lend money in the form of term loans or working capital loans to the business enterprise. The lenders require financial information of the business to know their repaying capacity of interest and principal amount.
Creditors are the ones who provide goods on credit to the business enterprises so before supplying goods on credit they would like to ensure the credit worthiness of the Enterprise. Therefore, accounting information helps the creditors to know the financial soundness of the enterprise so that they can decide whether to supply the goods on credit or not.
Employees are the persons who work with the firm therefore they are interested in the accounting information so that they can analyze the paying capacity of the enterprise along with the ability to pay bonuses, provident fund and even the possibility of promotion. As a whole employees assess whether their future is secured with the company or not.
Customers are the ones to whom the company provides goods & services. Usually big organizations prefer to deal with the parties who can supply goods for long term. Therefore, Customers requires financial information of the business to ensure the stability & financial soundness of the business they are dealing with.
The government bodies collects various taxes from the business enterprises such as income tax, Goods & service tax, Corporate tax etc. so they are interested in the financial information of the business to assess the liability of the taxes of the enterprises.
The competitors of the business also require financial information to make comparisons so that they can make the strategies to update themselves according to the business enterprise if the competitors feel that the earnings & growth of the business is better than that of them.
The credit rating agencies are the ones that give ratings to the companies. These credit rating agencies requires the financial statements of the company to give ratings as the ratings are based on the financial information only.
The general public is interested in the growth potential of the organization. Also companies provide job opportunities to the public and usually the goods & services are supplied to the public. So public is interested in knowing financial information of the business. Moreover, financial data can be used by analysts, various researchers while conducting survey and students for their education.
The union needs information of the business they are part of so that they can assess the company’s ability to pay their compensation & other benefits.
The investment analysts need the information of various companies mostly the companies that trades on stock exchange. So they need to be updated on the financial records of the business so that they can give investment advice to their clients
Thus, users of the financial statements are the individuals, firms, corporates or any other person or organization that is interested in the accounting information of any business so that they can draw conclusions and take various decisions. The main users of financial information include management, investors, shareholders, creditors, lenders etc.