Stakeholders and their Information Requirements

The purpose of a business is not merely to earn profit, but to communicate meaningful financial information to everyone who has a stake in it. A stakeholder is any person or group associated with the business. Their stake can be monetary (like the owner’s investment or a loan) or non-monetary (like a researcher’s interest or a consumer’s reliance). Stakes can also be active or passive, direct or indirect.

Because each stakeholder has a different reason for being connected to the business, each one needs different information from the financial statements. These stakeholders are also called users of accounting information, and they are classified into two broad groups: internal users (inside the business) and external users (outside the business).

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Internal Users

Current Owners (Internal)

• Objective: To grow their wealth by investing in the business.
• Information Requirement: They want to know the extent of profit earned in the last accounting period and the current position of the business’s assets and liabilities.

Manager (Internal)

• Objective: A career. The manager acts as an agent of the owners (employers).
• Information Requirement: Financial statements are like a report card. Managers need information about both profits and the financial position to assess their own performance and guide decisions.

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External Users

Government (External)

• Objective: Regulatory — to lay down rules in the best public interest and protect the rights of all stakeholders.
• Information Requirement: Since the government levies taxes on the business, it is particularly interested in information about profitability, along with a lot of other regulatory information.

Prospective Owner (External)

• Objective: To make an investment in the business and grow their wealth.
• Information Requirement: Past profits and financial position, because these are indicative of likely future performance.

Bank (External)

• Objective: Safety of the principal (the loan amount) and the periodic return (interest).
• Information Requirement: The bank is interested in the adequacy of profits only as an assurance that the principal and interest will be returned on time. The bank is equally concerned about the form in which assets are held — specifically, whether a large portion of assets is in cash or near-cash form. This aspect is known as liquidity.

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Box 1: Accounting Process (up to Trial Balance)

The textbook includes a summary of the steps that lead up to the preparation of financial statements. This is the process that generates the information stakeholders need.

1. Identify transactions that are to be recorded.
2. Record transactions in journal. Only transactions measurable in money terms are recorded. The system used is the double entry system, where every transaction has two aspects: a debit and a credit. Repeated transactions of the same nature are recorded in subsidiary books (also called special journals) instead of the main journal. For example:
   • All credit sales → Sales Book
   • All credit purchases → Purchases Book
   • Return inwards → Return Inwards Book
   • Return outwards → Return Outwards Book …