Fundamentals of Accounting, Business and Management I

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Users of Accounting Information

Users of Accounting Information

The accounting information has many uses. In this module, you will learn
who accounting users are as well as the types of accounting information they
use. The basic objective of accounting is to provide information which is
essential to the decision-makers as they plan and control the activities of the
business enterprise. The Accounting information is also needed by outside
parties who have investments or interests in the activities of the business.
Learning Objectives:
At the end of this module, the learner shall be able to:
1. Define external users and give examples;
2. Define internal users and give examples;
3. Identify the types of decisions made by each group of users; and
4. Describe the type of information needed by each group of users.
External Users of Accounting Information
External users are those groups or persons who are outside the organization
for whom accounting function is performed. The following can the various
external users of accounting information:
Creditors. Someone who has granted credit. If a bank lends a company
money, the bank is a creditor. If a supplier sold merchandise to a company on
credit, the supplier is a creditor. A trade creditor wants to know whether his
present or prospective customer is capable of settling his financial
obligations within a short period of time. He must be aware of the signs that
may indicate that a particular customer is having certain financial difficulties,
if the business operations of that customer would continue, and if there is
enough margin of safety in case the business operations of that customer was
suddenly interrupted. Suppliers study carefully the financial statements of
their major customers in order to properly plan their product deliveries, and
for them to review their own financing needs, product designs, plant
expansion plans and other marketing strategies.
Banks and Other Lenders. Aside from investors, the banks and other
lenders provide the short-term and long-term financial needs of the
borrower. A lender needs information that will help in assessing the safety of
his investment, or the risk involved in his lending exposure. He must know
whether the principal amount loaned out, plus the corresponding interests
that would accrue on such loan, can be collected from the borrower as they
become due. He must be aware of what other means of protection he has just
in case the borrower becomes insolvent.
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 Investors. The investors provide the capitalization needed by the business
enterprise, and as a result, they are usually exposed to higher risks compared
with the other interest groups. The data in the financial statements of the
investee help both the present and future investors in assessing the
profitability of the business enterprise, and in determining whether to expect
satisfactory return on their investment. The financial information made
available to the investors can help them decide whether they should buy hold
or sell their investment in the business enterprise.
Suppliers. The Supplier offers goods or merchandise on cash basis or on
credit term depending on the paying ability of the customer (business). The
supplier uses the accounting information to determine the credit worth of
the customer-whether the amount owing will be paid when due.
Customers and clients. The customers of the enterprise, most especially the
major customers, are interested to know whether their supplier is capable of
continuously supplying their needs for raw materials, spare parts, services,
and even technological information. A customer has a long-range
involvement with his supplier's plan and decisions.
Research Scholars. Accounting information, being a mirror of the financial
performance of a business organization, is of immense value to the research
scholar who wants to make a study into the financial operations of a
particular firm.
To make a study into the financial operations of a particular firm the
research needs detailed accounting information relating to purchases, sales,
expenses, cost of materials used, current assets, current liabilities, fixed-
assets, long-term liabilities and shareholders' fund which is available in the
accounting records maintained by the firm.
Government. Governments keep a close watch on the firms which yield good
amount of profits. The state and central Governments are interested in the
financial statements to know the earnings for the purpose of taxation. To
compile national accounts, the accounting is essential.
Regulatory Authorities. They ensure that the company's disclosure of
accounting information is in accordance with the rules and regulations set in
order to protect the interests of the stakeholders who rely on such
information in forming their decisions.
Internal Users of Accounting Information
Owners. The owners provide funds for the operations of a business and they
want to know whether their funds are being used properly or not. They need
accounting information to know the profitability and the financial position of
the concern in which they have invested their funds. The financial statements
prepared from time to time from accounting records depict the profitability
and the financial position of the business.
Management. The management of the business is greatly interested in
knowing the position of the firm. The accounts serve as the basis; the
management can study the merits and demerits of the business activity using
them. Thus, the management is interested in financial accounting to find
whether the business carried on is profitable or not. The financial accounting
 Fundamentals of Accounting, Business and Management I
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Users of Accounting Information

is the "eyes and ears of management and facilitates in drawing future course
of action, further expansions etc."
A manager is responsible for organizing, planning, directing, and controlling
the operation of the business. Operation must be controlled to ensure that it
is running as planned. A manager must also be a good steward, protecting
the business resources and helping it grow in value. Financial reports are
used to evaluate performance of the business and assess the manager's
quality of management and stewardship. Accounting information is also
helpful to the management in fixing reasonable selling prices. In a
competitive economy, a price should be based on cost plus a reasonable rate
of return.
Stakeholder. A stakeholder refers to a person or entity who has an interest
in the economic performance of a business.
Employees. Employees are interested in the financial position of a concern
they serve, particularly when payment of bonus depends upon the size of the
profits earned. They seek accounting information to know that the amount of
bonus they receive is correct. The employees want higher wages, benefits,
good working conditions and security of tenure. A review of the company’s
financial reports will enable them to assess the ability of the business to
grant these demands. Whether the company cannot afford to grant higher
salaries and more benefits of the business, can be reflected in its financial
reports.
Channels of Accounting Information Flow
Accounting in this day and age has become the heart of information of any
business endeavor and its stakeholders. Figure 3.1 shows the reporting
process comprising four channels of accounting information flow:

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 Figure 3.1 Channels of Accounting Information Flow

From the processed accounting data, there are at least four types of reports
that may prepared.
A. Management reports are internal reports prepared for management
use. The management required additional information such as
product cost, estimate of profit to be earned for a planned project,
comparison of two alternative courses of solving a problem, and
budgets.
B. All firms are required to prepare and file Tax Returns to the Bureau
of Internal Revenue (BIR). Different taxes require different tax forms
which are to be filled up and submit to the BIR. Example: Income Tax,
VAT, Sales Tax, among others.
C. Some firms, by the nature of their organization/operation, are
required to prepare Special Reports by certain regulatory bodies. For
example: banks prepare monthly, quarterly, and annual reports to be
submitted to Bangko Sentral ng Pilipinas.
D. Financial Reports are the main source of information of
stakeholders. These are general purpose financial statements usually
audited by a Certified Public Accountant who attest to its fair
presentation and validity thus making it reliable and acceptable by the
stakeholders.
Accounting Information System

Information system is an orderly way of gathering and processing

the data so that meaningful reports may be prepared and used for
decision making.
Accounting Information System (AIS) involves an orderly way of
accumulating and reporting business transactions through a process
of analyzing, measuring, recording, classifying and summarizing, and
from which reports are generated for proper communication to
decision-makers.
 Fundamentals of Accounting, Business and Management I
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Users of Accounting Information

Accounting is a language of business because it communicates vital

information to statement users for decision making purposes. The
firms conduct business transactions every day and keep track of these
through pertinent documents. The gathered documents are analyzed,
measured, recorded and summarized into financial reports by the
account.
The stakeholders carefully study the reports and make decisions
accordingly. Accounting information and decision making are
interactive in nature. Decisions made will affect the activities of the
business which in turn will affect the resulting accounting information
after repeating the process of accumulation and communication.

Components of an Accounting Information System

For any system to work (be it manual or computerized) there must be
people, documents, records, methods and equipment involved. These
are the five components which an accounting information system
must process.

Data Collection
Data processing starts with the gathering of business documents.
These are business papers evidencing that business transactions took
place. A business transaction is an activity or event taking place in
business which is expressed in terms of money. Examples are: buying
or selling goods, receiving or paying cash, rendering or receiving
service and borrowing or lending money. A business document
describes in words and amounts the nature of the transaction.
Examples are: official receipt (when receiving cash), cash voucher
(when paying cash), and invoice (when selling and buying goods or
services). These documents come from various departments. The
official receipts are prepared by the Collection Officer or Cashier. the
sales invoices are prepared by the Sales Officer while the cash
vouchers are prepared by the Disbursing Officer. Internal Control
requires that documents be properly controlled, numbered and
stored. These documents may be prepared manually or computer
generated.

Data Processing
As financial transactions are entered by the accounting department,
these are then analyzed, measured, recorded and classified. An input
device or instrument is used to record the data captured in the
documents. In the manual system, the pen or pencil is the input
device. In a computer-based system the keyboard is the input device.
Then entry prepared, be it manual or computerized, is called journal
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entry. Other forms of input devices are the scanner and bar code
readers (popularly used by groceries to ring up sales).

Records are the books of accounts that must be maintained by the

accounting department. Just as one gathers lecture notes and places
them in a notebook, accounting data are gathered and recorded in a
book called the journal. And since the recording will involve a large
number of data too diverse to be understood by the decision makers,
the data is organized and classified into related groups and stored in
another book called the ledger. The first three phases of the system
cover the mechanical or procedural phase of accounting called
Bookkeeping.

Methods involves the procedures of processing captured data from

the document. In accounting, information are processed in a
meaningful manner by journalizing, classifying, summarizing,
reporting, and interpreting. The processing can be done manually or
electronically depending on the size of the organization, the volume of
data to be processed, the amount of information required, and the
need for prompt access to the data. The computerized system follows
the same logic as the manual system although the processing is done
differently.

Finally, the organized data become meaningful information when

summarized and reported in the financial statements prepared by the
accountant. The accountant further assists the decision makers in
making meaningful decisions by interpreting the financial data
through a tool called financial statement analysis. Figure 3.2 shows a
simple accounting information system.

Analyzed Summarized
Data Classified Decision
Measured Reported
gathered Stored Making
Recorded Interpreted

Figure 3.2 Accounting Information System

In an electronic data processing (EDP) environment, processed data

may be recorded, classified and stored in a computer. When needed,
information may be drawn out from the system using output devices
such as the printer. A software is available to take care of the
recording including the generation of documents and records and
even the computations in the interpreting phase. However, the
evaluation of the accounting information and the preparation of
recommendations require the critical thinking and competence of the
accountant and the decision makers as well. The good news is that the
electronic data processors have freed accountants from the routine
aspects of processing data. Figure 3.3 shows the computerized
accounting system.
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Users of Accounting Information

INPUT PROCESS OUTPUT

•From the •The data are •Reports

source measured, come out
document, recorded, from the
data are classified, processed
analyzed summarized data.
encoded by and stored
the by the
employees computer

Figure 3.3 Computerized Accounting System

The employee analyzes the data contained in the business document,

arranges the data to be encoded and using software application key
enters these into the computer. The computer processes the data
input according to the instruction.

There are two ways of processing the accounting data: online and
batch processing. In online processing, data are entered and
processed as soon as the document is available. It means that the
database is immediately updated and timely reports can be submitted
to statement users. However, this method may be costly because of
the software and hardware requirements. In batch processing, data
is first accumulated over a period of time before it is processed and at
once in a batch, either weekly, daily or monthly. Database is not
immediately updated for immediate use of statement user.
Financial Report
The accounting information resulting from transactions or economic
events which were documented, recorded and classified, are
summarized into financial statements. These are prepared at least
annually and are directly toward the common needs of practically all
of the stakeholders.

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Complete Set of Financial Statements and their definition
According to the revised Statement of Financial Accounting Standard No.
1, as approved by the Accounting Standard Council, a complete set of
financial statements includes the following components:
1. Balance Sheet
2. Income Statement
3. Statement of Changes in Owner's Equity
4. Statement of Cash Flow
5. Notes, comprising of the summary of significant accounting policies
and other explanatory notes
Balance Sheet
Balance sheet, also known as the Statement of Financial Position, is one of
the primary statements. It shows the position or condition of a business,
which is assumed to be going concern at a given time. The elements of
balance sheet are the assets, liabilities, and owner's equity.
Let's assume that as of May 31 of the current year your business has
listed a total of P1,000,000 assets, against P400,000 liabilities. The net
asset of your business is P600,000. Compare this against business of your
friend whose asset is listed as P1,500,000 against which it owes creditors
P1,200,000. Your friend has net worth of P300,000 only. This shows that
your business is financially stronger and solvent. Solvency is the ability
of the business to pay for its liabilities. It is one way of determining the
financial strength of the business. The more assets left after deducting the
liabilities the more solvent the business is.
The financial picture of the business is not complete with only the balance
sheet. Supporting the balance sheet is the income statement.

(The contents and more examples of the balance sheet are further discussed
in weeks 10, 11 and in week 15).
Income Statement
Income statement is a tool used in evaluation management's
performance. It also helps in assessing the inflow and outflow of cash. The
income statement also referred to as the statement of performance or
statement of earnings. The elements of income statements are revenues,
and expenses.
Revenues earned for the year P750,000, while expenses incurred
amounted to P500,000 only, the profit is P250,000. The revenues is
greater than expenses incurred by the business, therefore the results of
operation is favorable or profitable. A net income or profit increases the
assets if the business which in turn increases the business net worth or
owner's equity. A loss occurs when expenses exceed revenues. A loss
decreases the assets which in turn decreases net worth or owner's equity.
Another report prepared by the accountant is the Statement of Changes
in Owner's Equity.
(The contents and more examples of income statement further discussed in
weeks 10, 11 and 15).
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Users of Accounting Information

Statement of Changes of Owner's Equity

It explains the activities for the period of time that changed the owner’s
share over the net assets of the business. Net worth or owner’s equity is
affected by the following activities:
 Investment
 withdrawal
 Profit or loss

Assumed the Balance Sheet this year showed net worth of P600,000, last
year showed net worth of P500,000, the owner’s equity increase P100,000
may be due to profit of P50,000 plus additional investment of the owner
amounting P50,000. Or may be due to profit of P150,000 less owner’s
withdrawal of P50,000. A cash withdrawal decreases the assets which in turn
decrease owner’s equity.
(The contents and more examples of Statement of Changes in Owner's
Equity are further discussed in week 10, 11 and in week 15).

Cash Flow Statement

Cash Flow Statement reflects the financing and activities of the business
or the source and applications of funds during the period. It also shows
the changes of cash and cash equivalents during the period. Note that
cash equivalents are those short-term, highly liquid which are easily
convertible to cash.
The statement of cash flows summarizes the inflows and outflows of cash
that are directly associated with:
 Ordinary operating activities: cash inflows and outflows from
normal operating activities of the entity. These includes collection
from customers, cash from sale of goods and services to customers,
payments of operating expenses, payments of trade obligations, etc.
 Investing activities: cash inflows and outflows from the sale or
purchase of assets other than inventory, such as: proceeds from the
sale of the fixed assets, payments for the purchase of fixed assets, etc.
 Financing activities: cash inflows and outflows from the owners and
creditors of the organization, such as: cash investments and
withdrawals of the owner or owners, proceeds from repayment of
loans, etc.

Assume that the cash (assets) at the end of the current year was listed
in the balance sheet as P50,000, while the balance last year showed it
to be P25,000. you might ask why the cash increased by P25,000 only
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 when business earned P250,000, and the owner invested another
P50,000.
(The contents and examples of Cash flow statement further discussed in
week 10, 11, and 15).
Objectives of the Financial Statements
The term statement simply means a revelation or declaration of certain
information that is believed, by the entity making it, to represent the truth.
In financial statements are thus revelations and declarations of information
about the outcome of the financial events and activities that happened during
a reporting period, including the financial condition of a business at the end
of the reporting period. The report on the performance of management
serves as the steward of the resources that were entrusted to them.
General Purpose
General purpose financial statements are intended to meet the diverse
information needs of the wide range of data-users, also referred to as
external reports. These are prepared and presented in accordance with a
certain set of generally accepted accounting rules, techniques, and forms.
Specific Purpose
Also known as special purpose reports, these are prepared to meet the
specific information needs of certain decision-makers. The most frequent
users are the management of the business. These are internal reports.
Through the financial statements, information about profitability, financial
condition, and other financing and investing activities of the business
enterprise are relayed to both the internal and external data-users. Since
data-users have diverse and even conflicting interest in the business
enterprise it is highly probable that not all of their information needs would
be fully satisfied by the traditional financial statements. However, there are
some information needs that are common to both the internal and the
external data-users that could be supplied by the financial statement.
The comparative financial statements are helpful in assessing the
enterprise's profitability and solvency, which in turn would give some
important financial signals that a mature data user can understand. A data
user should have some background of the accounting and business
terminologies, particularly accounting recognition and measurement
techniques, in order to understand and use the financial information.
Glossary
Assets resources owned by the reporting business enterprise.
Capital is also called equity. Also an adjective that references property, plant
and equipment used in a business.
Equity owner's claim to the assets of a business also called net assets and
capital. See more related terms capital and owner's equity
Liabilities or economic obligation s of the enterprise to other entities.
Liabilities often have the word "payable" in the account title. Liabilities also
include amounts received in advance for a future service to be performed.
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Users of Accounting Information

Net income excess earned after subtracting al expenses from revenue (sales)
for a period. Also called net profit.
Net loss the bottom line of the income statement when revenues and gains
are less than the aggregate amount of cost of goods sold, operating expenses,
losses, and income taxes (if the company is a regular corporation).
Owner's equity owner's right and claims owes the owner(s). The good stuff
left for the owner after all liabilities (amount owed) are paid.
Profit amount a business's revenues exceed (greater than) expenses. In
other words, the amounts we earned were greater than our expenses.
Source documents are documents that evidence a business transaction has
occurred such as invoices and checks.
Transaction any event or condition that must be recorded in the books of a
business because of its effect on the financial condition of the business, such
as buying and selling. A business deal or agreement.

References
Textbooks:
Kimwell, M.B., (2005), Fundamentals of Accounting. GIC Enterprise & Co.
Inc. 2017 C.M. Recto Avenue, Manila Philippines.
Manuel, Z.V., (2017), "Accounting Process, Basic Concepts and Procedures,
Int’l Edition”. Raintree Trading & Publishing, Inc.

Online supplementary materials

Ammar, A. & Abdul, M. (2010), 4 Types of Financial Statements. Available:
http://accounting-simplified.com (last accessed 4/9/2017)
Fareed, S. (2015, January 21), The Users of Accounting Information and Their
Needs.http://fareedsiddiqui.expertscolumn.com/article/users-
accounting-information-and-their-needs (last accessed: 4/9/2017).
Koornhof, C. (2003), Accounting and Accounting Information. Available:
http://repository.up.ac.za/bitstream/handle/2263/28951/02chapte
r 2.pdf (last accessed 4/9/2017).
Marshall, D. (2003, August 20), Bookkeeping. Available:
http://www.dwmbeancounter.com(last accessed 4/9/2017).

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