While understanding how business works and importance of accounting in business we understood that financial information is necessary for decisions by managers. Although management is one important user of accounting information but they are not the only one who require such information.
There are other stakeholders as well who can be internal or external to organization require accounting information in their economic decisions.
To disclose such accounting information a formal set of statements accounting information with specific dimension is prepared called financial statements. These statements are then made available to users of accounting information which they use in decision making process.
Major users of accounting information and what information do they need and why is explained as follows:
Owners / Shareholders
Owners of the business are the reason why business exist. It is because of their investment at first place business was born and due to same reason they have the biggest stake in the business. They need to know whether their investment is in the right hands. They seek information about:
- financial performance of the business i.e. the resources are utilized in a way that has added to their investment
- financial position of the business i.e. current position of its assets against liabilities etc
These users are potential source of finance to the business. With new investments money will flow in the business and thus creating more opportunities for business. These users require information if the business can promise a favourable return on their investment and how long investment can stay profitable considering connected factors.
Creditors / Suppliers
Suppliers provide business with the items required to run the actual business. They include suppliers of raw material or other services that help business produce goods or provide services to its customers. As majority of the transactions with the suppliers are on credit (the reason why suppliers are also called creditors) and business is under obligation to pay them on timely basis thus they want to be sure if the money will get paid and whether offering additional credit to the business is wise.
As the name suggest are the ones who lend or given loans to business if it needs. These are usually financial institutions like Banks. They are interested in accounting information of the business to know whether risks associated with the lending to the business are covered appropriately by the interest they are charging to business and whether principle amount will get paid on time. This assessment is usually made by considering the current and prospective state of affairs of the business.
Employees are another class of stakeholders that depends heavily on the business and its progress. As their salaries and bonuses depends on the position and performance of the business they require information to know if staying in particular entity is worthwhile or should they switch. They want to assess how much profit business made and how much can be distributed to employees in terms of bonuses and premiums.
These users rely on the business to fulfill their economic and social needs. Customers may include such customers who require goods or services of the business in their business or simply household customers for consumption to satisfy their daily needs. They are interested in knowing if the entity can provide them on continual basis without any interruption. Business with weak financial position will render unreliable in the eyes of customers.
Governments receive taxes on the profits earned by the business (direct tax). Some businesses are also liable to collect tax from customers on behalf of government (indirect tax). To know if tax has been calculated appropriately, they require information which is collected through accounting.
Competitors are those organizations or individuals that are selling similar products or services to similar class of customers. They are interested in the accounting information of the business to assess how far a business can handle a competition and at what level. What new developments are made and what changes have been made in the products and services the business is providing so that they can also adjust their strategy.
General public who may not have a directly vested interest in the business however as it is operating in the location where they reside likes to know about the objectives of the business, its operations and how it may affect their lives if it operates or continue to operate in its current state and location. As society is shared by business and people surrounding it, business is under social obligation to take care of even those people are not direct stakeholders of the business. For example by taking measures to eradicate pollution caused by business operation or give employment to people residing in locations where it operates. Such information is disclosed by the entity in the financial statements it publishes.
Author: Hasaan Fazal
Accountant by heart and took it not just as a profession but as a passion. Founded ACCALIVE and PakAccountants. At ACCALIVE he is a full time teacher and writing regularly for PakAccountants on multiple business related topics including Excel, interview tips and more.
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