Who Uses Accounting Information? The Four Major Groups of External Users

Who Uses Accounting Information? The Four Major Groups of External Users

One of the fundamental principles of accounting is ensuring that the financial information of a business is available for both internal and external use. While internal users rely on different financial reports to inform managerial decisions, external users use this information to make decisions outside of the company.

In this article, we’ll take a closer look at the four major groups of external users who rely on accounting information.

1. Investors

Investors are perhaps the most relevant external users of accounting information. They are interested in the financial performance of a company since it impacts the value of their investment. Investors use accounting information to assess the risk and return of their investments.

For instance, investors might look at the company’s income statement to see whether it’s profitable and its balance sheet to understand its assets and liabilities. They also examine other financial statements, such as the statement of cash flows, to evaluate the company’s liquidity and cash management strategies.

2. Banks and Financial Institutions

Banks and financial institutions utilize accounting information to determine whether they would lend money to the company. They analyze the financial statements of a company to assess its creditworthiness and financial stability.

Additionally, banks use accounting information to determine the probability that a company would be able to repay a loan with interest. They use financial ratios such as debt-to-equity or interest coverage ratios to evaluate the company’s ability to meet its financial obligations.

3. Regulators and Governments

Regulators and government agencies also rely on accounting information when implementing rules and regulations. Accounting information aids regulatory authorities in detecting fraud, financial irregularities, and other non-compliance issues.

For instance, the government uses accounting information to regulate taxes, monitor environmental compliance, and enforce labor laws. Accounting data is also critical in issues related to national security and infrastructure funding.

4. Suppliers and Customers

Suppliers and customers largely rely on accounting information to determine whether they should do business with a company. Suppliers use accounting information to determine the creditworthiness of a customer before extending credit.

On the other hand, customers use accounting information to evaluate a company’s financial stability and reputation. Additionally, they can assess a company’s ability to deliver goods and services.

Conclusion

In conclusion, accounting information is essential to several external users who need it to make informed decisions. Investors, banks, regulators, suppliers, and customers benefit from accounting data to assess business risks, creditworthiness, and financial stability of a company.

As such, it’s essential for companies to present reliable financial statements that adhere to accounting standards to enable external users to make sound decisions.