The accounting system gives financial information to a wide scope of people whose goals of studying the data are different. The three main users of accounting information are; the Internal users, the External users, and Government/ IRS.
Each group uses financial data in different ways, and requires the facts to be presented differently. However, this article on the difference between internal and external users of accounting information will focus on only the internal and external users.
Why Do Users Need Accounting Information?
The main aim of establishing a business is to make profit. Except you are the government whose aim is not to make profit but render essential services, no man starts a business to make loss or provide free services.
To enhance productivity and increase profitability, a company needs to make some important decisions. Therefore, users of accounting information need it to make important and quick decision on budgeting, forecasting, costing, sales and purchase of business, merger, investment, etc.
Internal users of Accounting information
There are different types of accounting. However, the type which supplies managers and business owners with significant financial data that is useful for decision-making is generally called managerial accounting.
Internal users of accounting information also known as primary users, are those people who run and manage the day-to-day business activities of the inside area of a company.
Some of the internal users of accounting information are;
- Owners and Stockholders
- Internal Departments
- Internal Auditor
How Do Internal Users Use Accounting Information?
Some of the important ways internal users use accounting information are:
- Evaluating how the management has carried out its obligation regarding protecting and dealing with the organization's assets
- Making decisions on when to borrow or invest company funds
- Shaping decisions about expansion or downsizing
External users of Accounting Information
Commonly known as financial accounting, the record of a business’ financial history for use by external entities is used for many purposes. External users of accounting are the people who are outside the company but use accounting information for their own purposes.
There are six groups of external users of accounting information, they are;
- Owners and prospective owners
- Creditors and lenders
- Employees and their unions
- Governmental units
- General public
Each group has their own interests in the company and needs answers to exceptional questions regarding the business. The groups and some of their potential questions are:
Owners And Prospective Owners
Has the business enterprise earned best earnings on its general investment? Should we invest in this company? Should the current investment in the company be increased, decreased, or maintained at the same level? Can the company still be profitable after installing costly pollution control equipment?
Creditors And Lenders
Should the company be granted a loan? Can the entity pay its obligations as they become due?
Employees And Their Unions
Is the company capable of paying increased wages? Is the company financially able to offer long-term employment to its employees?
Does the business offer helpful goods at reasonable costs? Will the business endure sufficiently long to respect its product warranties?
Is the business charging a reasonable rate for the services it provides?
Is the organization giving valuable products and services and productive work for citizens without causing genuine natural issues?
How Do External Users Use Accounting Information?
The following are some of the ways external users us accounting information:
- Stockholders are entitled to know how a company is running its investments
- Both the Federal and State Governments need tax returns and other tax related documents which are mostly prepared by accountants
- Banks or lending financial institutions may use accounting information as a guide to decisions like whether to lend money to investors or how much to lend a business. Accounting information will also guide investors on investment decisions
General-purpose financial statements provide majority of the information which will be needed by external users of financial information. These financial statements give comprehensive insights on a company’s financial position, cashflow, and the results of operations.
Most companies publish these statements in annual reports, also known as a 10-K or quarterly reports also known as 10-Q. The annual report includes the independent auditor’s opinion on the fairness of the financial statements, in addition to details about the company’s activities for the year, products, and plans for the future.
Typically, for a public company, the best place to find these reports is on their company's website under the Investor relations section. Financial statements used by external users are prepared using Generally Accepted Accounting Principles, or GAAP.
The difference between external and internal users of financial information is that the internal users of accounting information are people within a business organization who use financial information, examples are business owners, company managers, and employees while the external users are people outside the business entity who use accounting information. Examples of external users are distributors, banks, clients, investors, prospective investors, and tax administrators.
Accounting and financial information is important because it enable internal and external users to find, measure, classify and evaluate operations and activities of an organization to substantiate and make decision.