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Accounting as a Source of Information, and Its Users

Accounting as a Source of Information, and Its Users

The  Accounting Principles Board of The American Institute of Certified Public Accountants (AICPA) highlighted that the primary function of accounting is to deliver quantitative information, primarily financial, about economic entities to aid in economic decision-making. Often referred to as the “Language of Business,” accounting is the standard method for communicating financial information to various stakeholders, including individuals, organizations, and government agencies. This information covers aspects such as financial position, operating results (profit or loss), and cash flows.

Both internal and external users need this information to make informed decisions about the allocation of limited economic resources.

To ensure efficient and effective resource allocation, users require accurate and timely financial information. Accounting meets this need by providing essential insights into the financial and operational status of an enterprise, serving as the primary communication channel for financial information to stakeholders such as owners, lenders, managers, and regulatory agencies. By delivering relevant, reliable, and timely information, accounting supports users in making better decisions.

Modern business enterprises typically maintain detailed accounting records due to the complexity of their operations. Managers would struggle to recall daily transactions without relying on the accounting process, which begins with recording business transactions and concludes with preparing summarized financial statements. Therefore, accounting as an information system is vital for managing the complexities of modern businesses.

Accounting as a Source of Information

Accounting is a service activity. Its function is to provide qualitative information, primarily financial in nature, about economic entities, intended to be useful in making economic decisions.

As an information system, accounting gathers data and communicates economic information about an organization to various users whose decisions and actions are influenced by its performance. The accounting process starts with identifying financial transactions and ends with preparing financial statements, such as the Income Statement and Balance Sheet. Each step in the accounting process generates information, which is not an end in itself but a means to disseminate information to users. Accounting information is crucial for predicting, comparing, and evaluating the earning power and financial position of a business enterprise, making the dissemination of this information a fundamental function of accounting.

Users of Accounting Information

Users of accounting information can be categorized into internal and external users.

Internal Users:

  1. Owners: Owners invest capital in the business and bear the maximum risk. They need to know the profit earned or loss suffered by the business, as well as the safety of their capital. Financial statements provide this information.

  2. Management: Management relies heavily on accounting information for making informed decisions, such as setting selling prices, controlling and reducing costs, and investing in new projects.

  3. Employees and Workers: Employees and workers are often entitled to bonuses linked to the enterprise's profit. They are interested in financial statements to assess profitability and whether the enterprise has met its obligations, such as depositing dues into provident fund and employees' state insurance accounts.

External Users:

  1. Banks and Financial Institutions: These entities provide loans to businesses and monitor their performance to ensure loan repayment and safety. They use accounting information to assess the business’s progress and financial health.

  2. Investors and Potential Investors: Investors take on risk and lack direct control over business operations. They rely on accounting information to evaluate the enterprise's earning capacity and the safety of their investment.

  3. Creditors: Creditors supply goods or services on credit and need to assess the business's creditworthiness before granting credit. Financial statements help them in this assessment.

  4. Government and Its Authorities: The government uses financial statements to compile national income accounts, make policy decisions, and assess tax dues such as Excise Duty, GST, and Income Tax.

  5. Researchers: Researchers use accounting information in their studies and analyses.

  6. Consumers: Consumers need accounting information to ensure good accounting control, which can help reduce production costs and, consequently, prices. The government also uses this information to set fair prices for products to avoid exploitation.

  7. Public: The general public is interested in the ongoing operation of businesses as they contribute significantly to the economy through employment, patronage to suppliers, and more.

Accounting provides valuable financial information to various user groups, aiding them in decision-making.

For a deeper understanding of accounting, it is essential to explore the fundamental characteristics that make accounting information authentic and accurate.

This will be discussed in our next article on Qualitative Characteristics of Accounting Information.


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