Information needs of various users

There are several groups of people who have a stake in a business organization managers, shareholders, creditors, employees, customers, etc. Additionally, the community at large has economic and social interest in the activities of such organizations. This interest is expressed at the national level by the concern of government in various aspects of the firms' activities, such as their economic wellbeing, their contribution to welfare, their part in the growth of the national product, to mention only a few examples.

These Include

Shareholders and Investors

Since shareholders and other investors have invested their wealth in a business enterprise, they are interested in knowing periodically about the profitability of the enterprise, the soundness of their investment and the growth prospects of the enterprise. Historically, business accounting was developed to supply information to those who had invested their funds in business enterprises.

Creditors

Creditors may be short-term or long-term lenders. Short-term creditors include suppliers of materials, goods or services. They are normally known as trade creditors. Long-term creditors are those who' have lent money for a long period, usually in the form of secured loans. The main concern of the creditors is focused on the credit worthiness of the firms and its ability to meet its financial obligations. They are therefore concerned with the liquidity of the firms, its profitability and financial soundness. In other words, it can also be stated that creditors are interested mainly in information which deals with solvency, liquidity and profitability so that they could assess the financial standing of the firms.

Employees

The view that business organisations exist to maximize the return to shareholders has been undergoing change as a result of social changes. A broader view is taken today of economic and social role of management. The importance of harmonious industrial relations between management and employees cannot be overemphasized. That the employees have a stake in the outcomes of several managerial decisions is recognized. Greater emphasis on industrial democracy through employee participation in management decisions has important implications for the supply of information to employees. Matters like settlement of wages, bonus, and profit sharing rest on adequate disclosure of relevant facts.

Government

In a mixed economy it is considered to be the responsibility of the Government to direct the operation of the economic system in such a manner that it subserves the common good. Controls and regulations on the operations of private sector enterprises are the hallmark of mixed economy. Several government agencies collect information about various aspects of the activities of business organisations. Much of this information is a direct output of the accounting system, for example, levels of outputs, profits, investments, costs, and taxes, etc. All this information is very important in evolving policies for managing the economy. The task of the Government in managing the industrial economy of the country is facilitated if accounting information is presented, as far as possible, in a uniform manner. It is clear that if accounting information is distorted due to manipulations and window-dressing in the  presentation of annual accounts, it will have ill-effects on the measures the government intends to take and the policies it wishes to adopt.

Management

Organisations may or may not exist for the sole purpose of profit. However, information needs of the managers of both kinds of organisations are almost the same, because the managerial process i.e., planning, organising and controlling is the same. All these functions have one thing in common and it is that they are all concerned with making decisions which have their own specific information requirements. The emphasis on efficient and effective management of organisations has considerably extended the demand for accounting information. The role of accounting as far as management is concerned was highlighted earlier when we discussed about management accounting. Consumers and others: Consumers' organisations, media, welfare organisations and public at large are also interested in condensed accounting information in order to appraise the efficiency and social role of the enterprises in different sectors of the economy, that is, what levels of profits and outputs are being achieved, in what way the social responsibility is being discharged and in what manner the growth is being planned by the enterprises in-accordance with the national priorities etc.

Uses of Accounting Information

Accounting is part of an organisation’s information system, which includes both financial and non-financial data.  Accounting is the process of identifying, measuring and communicating economic information to permit judgment and decisions by users of the information.  The main objective of accounting is to provide information to the users.  Accounting is also required to serve some broad social obligations since the accounting information is used by a large body of people such as customers, employees, investors,  creditors and government. Accounting is commonly divided into

(1) Financial Accounting, and

(2) Managerial Accounting. 

Financial accounting refers to the preparation of general purpose reports for use by persons outside an organisation.  Such users include shareholders, creditors, financial analysts, labour unions, government regulations etc.  External users are interested primarily in reviewing and evaluating the operations and financial status of the business as a whole. Managerial accounting, on the other hand, refers to  providing of information to managers inside the organisation.  For example a production manager may want a report on the number of units of product manufactured by various workers in order to evaluate their performance.  A sales manager might want a report showing the relative profitability of two products in order to pinpoint selling efforts. The financial reports are available from the libraries or companies themselves where as managerial accounting reports are not widely distributed outside because they often contain confidential information.  The following figure shows that accounting is part of an organisation system which includes both Financial and  non financial data

Accounting provides information for the following three general uses :

 Managerial decision making   

Management is continuously confronted with the need to make decisions.  Some of these decisions may have immediate effect while the others have in the long run.  Decisions regarding the price of the product, make or buy the product or to dropt it,  to expand its area of operations etc.,  are some of the examples of decisions that face management and accounting provides necessary information to arrive at right conclusions.

Managerial planning, control and internal performance evaluation

Managerial accounting plays an important role in the planning and control. By assisting management in the decision making process, information is provided for establishing the standard.  Accounting also provides actual results to compare with projections. Planning can be defined as the process of deciding how to use available resources.  The key word in this definition is deciding, because planning is essentially a matter of choosing the set of alternatives which seem most likely to enable the organisation to meet its objectives.  Several different kinds of planning processes can be identified, but most important is periodic planning for the activities of the organisation as a whole. Control is the complement of planning.  It consists of management’s efforts to prevent undesirable departures from planned results and to take corrective action in response to it. The planning and control process consist of the following steps :

1. Setting standards as to what actual performance should be.
2. Measuring the actual performance.
3. Evaluating actual performance by comparing actual performance with the standards. 

This evaluation aids management in assessing actions already taken and in deciding which course of action should be taken in future. The main relationship between planning and  control is the planning produces a plan.  This becomes a set of instructions to be executed.  The results of the action taken on the basis of the plan are then compared with the planned results.  The difference of the plan are interpreted to determine what kind of response is appropriate.  A corrective response requires a change in the way of plan is carried out, while adaptive response requires replanning.  Each of these leads back to an earlier phase of the process and the loop is completed. For example where a marketing manger is given a target of sales revenues of Rs. 10 crores, the amount of Rs. 10 crores will serve as a standard for evaluating the performance of the marketing manager.  If annual sales revenues vary significantly  from Rs. 10 crores, steps will be taken to ascertain the causes for the difference.  When the factors leading to the variance are not under the control of the marketing manager, then the marketing manager would not be held responsible for it.  On the other hand the cause for variance is under the control of marketing manager then he will be held responsible in evaluating the performance of marketing manager.

External Financial reporting and performance evaluation

Accounting has always been used to supply information to those who are interested in the affairs of the company.  Various laws have been passed under which financial statements should be prepared in such way that required information is supplied to shareholders, creditors, government etc.  For example, the investors may be interested in the financial strength of the business, creditors may require information about the liquidity position, government may be interested to collect details about sales, profit, investment, liquidity, dividend policy, prices etc.  in deciding social and economic policies.  Information is required in accordance with generally accepted accounting principles  so that it is useful in taking important decisions