Users & Purposes of Accounting

Module 1:
Foundations of Accounting

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Identify internal and external users of accounting information.

➛ Explain how different users rely on accounting reports.

➛ Describe the purposes and benefits of accounting.

➛ Match users to the correct type of financial information.

➛ Analyze simple scenarios involving decision-making.

➛ Internal Users
➛ External Users
➛ Stakeholders
➛ Management
➛ Investors
➛ Creditors
➛ Government
➛ Regulators
➛ Financial Information
➛ Decision-Making

1. Internal Users
These people work within the organization and use accounting data to make operations better.

Managers
planning, controlling, and decision-making

Employees
job security, salary negotiations

Owners
profit, loss, financial health

Internal Auditors
checking accuracy of records

What They Need
➛ Budgets
➛ Cost reports
➛ Profitability information
➛ Performance reports
➛ Cash flow information

2. External Users
These users do not work in the company but have an interest in its financial position.

Investors
want to know profitability before investing

Creditors & Banks
want to know ability to repay loans

Government
taxation and legal compliance

Suppliers
credit decisions

Customers
stability of long-term suppliers

Regulatory Bodies
compliance with standards

General Public
interest in major companies

What They Need
➛ Financial statements
➛ Annual reports
➛ Tax returns
➛ Cash flow information
➛ Auditor’s reports

Decision-making
➛ Should we expand?
➛ Should we hire more staff?
➛ Should we increase/decrease prices?

Performance Measurement
➛ Making profit or loss
➛ Growing or shrinking
➛ Efficient or inefficient

Planning & Budgeting
➛ Sales
➛ Production needs
➛ Cash requirements

Legal Requirements
➛ Filing tax returns
➛ Submitting audited accounts
➛ Keeping official records

Communicating with Stakeholders
➛ Investors
➛ Banks
➛ Government
➛ Suppliers

Protecting Assets
➛ Fraud
➛ Misuse of resources
➛ Financial errors

Internal or External

➛ Manager
➛ Investor
➛ Bank
➛ Employee
➛ Supplier
➛ Government
➛ Owner
➛ Customer

Scenario:
A clothing shop wants to open a second branch. Who are the users of accounting information, and what financial reports would each want to see?

A bank receives a loan application from a new bakery. What accounting information must the bakery provide? Why does the bank need it?

➛ Name one internal user of accounting information.

➛ Name one external user.

➛ Why do investors use accounting information?

➛ True or False | Employees are external users.

➛ What is one major purpose of accounting?

---

Answers ➧ Here

---

Business Types & Accounting Assumptions ➧ Here