Information from accounting is used by
Accounting gives financial information to a wide range of people, each of whom uses that information for different reasons. The main people who use accounting information are internal and external users, as well as the government or IRS. Each group uses accounting information in a different way and has different needs for how the information is presented.
Accounting gives managers and owners important financial information that they can use to make decisions. Most people call this kind of accounting “managerial accounting.”
Some of the ways that accounting information is used by internal users are:
- They are figuring out how well management has done its job of keeping the company’s resources safe and running well.
- Choosing when a business should borrow money or invest it
- Making decisions about whether to grow or shrink
- External Users
The record of a business’s financial history for use by outside parties is usually called “financial accounting.” This record can be used for many different things. There are six types of outside users of accounting information. Each group is interested in the company in a different way and wants to know the answers to different questions. These are the groups and some of the questions they might ask:
owners and people who want to buy them. Has the company made a good enough return on the money it has spent? Should money be put into this business? Should the amount of money being invested now be increased, decreased, or kept the same? Can the company install expensive equipment to stop pollution and still make money?
Lenders and creditors, Should the company be given a loan? Will the business be able to pay its bills when they are due?
unions and their members. Does the business have enough money to pay higher wages? Is the company financially stable enough to keep its employees on for a long time?
Customers, Does the company sell useful items at reasonable prices? Will the company stay in business long enough to honor the warranties on its products?
governmental units. Is the price the company, like a public utility, charges for its services fair?
general public. Is the company making useful products and giving people good jobs without causing serious problems for the environment?
Some of the ways that people outside of the company use accounting information are:
Stockholders have the right to know how a company is handling its investments.
Tax returns and other documents are often prepared by accountants for the federal and state governments.
Accounting information can help banks and other lenders decide whether to lend money to a business or how much to lend.
Accounting information will also help investors decide where to put their money.
Financial statements for general purposes give most of the information that people outside of accounting need. These financial statements are official reports that show a company’s financial position, how much cash it brings in and how much it spends, and how its business is doing. Many companies put these statements in their annual reports, which are also called 10-K or 10-Q reports (quarterly reports).
The independent auditor’s opinion on the fairness of the financial statements is included in the annual report, along with information about the company’s activities, products, and future plans. Most of the time, the best place to find these reports for a public company is in the investor relations section of their website. Generally accepted accounting principles, or GAAP, are used to make financial statements that other organizations can use. In later parts, we’ll talk more about how GAAP is written.
The financial history of a business is important to government agencies that keep track of and use taxes. They want to know if the business is paying taxes the way the law says it should. IRC (which stands for “Internal Revenue Code”) is the language that is used to make financial statements that have to do with taxes. Getting your taxes done won’t be a part of this course.
Important Things to Keep in Mind
People inside a business who use financial information are called “internal users.” Owners, managers, and employees are all types of internal users.
External users are people or groups who use accounting information but are not part of the business entity (organization). External users include suppliers, banks, customers, investors, potential investors, and tax authorities.
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