Providing Accounting Information to its Users

The entire purpose of accounting is not just to record transactions, but to communicate the results. The accounting process generates raw data, but that data is useless unless it is presented in a way that helps people make decisions. This final step — presenting the information — is what makes accounting valuable.

The information is packaged into reports, statements, graphs, and charts. The two main groups who receive this information are internal users and external users.

Internal users are primarily the management of the business. They need information that is timely and detailed — things like the cost of manufacturing a single product, the profitability of a specific department, or daily sales figures. They use this data for planning (setting budgets), controlling (checking if targets are met), and decision-making (whether to expand a product line).

External users do not have the authority or resources to demand custom reports from inside the company. They must rely on the general-purpose financial statements that the company publishes: the Balance Sheet and the Profit and Loss Account. Each external group has a specific interest:

• Investors and potential investors want to know the risk and return on their investment. They look at profitability and share performance.
• Unions and employee groups care about the stability of the business, its profitability, and how wealth is distributed (e.g., potential for pay awards and bonus deals).
• Lenders and financial institutions focus on creditworthiness — whether the company can repay loans and pay interest on time.
• Suppliers and creditors need to know if amounts owed to them will be paid when due, and whether the business will continue to exist so they can keep selling to it.
• Customers are interested in the continued existence of the business, because they rely on a steady supply of products, spare parts, and after-sales service.
• Government and other regulators need information to check compliance with regulations (like tax laws) and to understand how resources are being allocated in the economy.
• Social responsibility groups, such as environmental groups, want information on the company's impact on the environment and what it is doing to protect it.
• Competitors use the information to assess the relative strengths and weaknesses of the business, for comparative analysis and benchmarking. Unlike other groups who share in the company's wealth, competitors use this information mainly for strategic purposes. …