Chapter 3

USERS OF ACCOUNTING INFORMATION

What do you want to know the business?
• How much income have I earned for a certain period?
• How much receivables do I have?
• How much do I owe my suppliers?
• How much is the value of my inventory?

What possible decisions can accounting support?

• Will I be able to pay my liabilities if I earn this much?
• Can I expand my business?
• Will I be able to afford buying new equipment?
• • Do I need to adjust my selling price?
• • Do I need to cut costs?
“What if you are from a Local Government
Unit (City/Municipality)? Do you think the
Local Government ( City/Municipality) will be
interested with your accounting
reports/records?”
Two Broad Categories of Users of Financial
Information

1. Internal User
 those individuals inside a company who plan,
organize, and run the business.
These users are directly involved in managing and
operating the business.
These include marketing managers, production
supervisors, finance directors, company officers
and owners .
Cont. (Internal Users)

• Include the following:

1. Management
• Employees that can make decisions for the company;
considered the brain of company
• Board of Directors, Top Managements, Middle Level Managers
& Supervisors
• Uses Financial Information in making business decisions;
allows management to identify problems immediately and to
respond accordingly
Cont. (Internal Users)

2. Employee
• Persons in the company aside from managers and owners or
stockholders; do not have authority to implement decisions
• Laborers, field workers
• Check if the business is profitable enough to Provide
compensation and other benefits
Cont. (Internal Users)

3. Owner
• Existing investors of the company; concerned mostly with the profits of the
company
• Founders of the company, owners, stockholders, partners, proprietors
• Mainly concerned with the returns earned from their investment; owners
taking active roles in operations of the business; also make decisions.
 External Users

• individuals and organizations outside a company who want financial

information about the company.
• Not directly involved in managing and operating the business.
• The two most common types of external users are potential investors
and creditors.
Potential Investors use accounting information to make decisions
to buy shares of a company
Creditors (such as suppliers and bankers) uses accounting
information to evaluate the risks of granting credit or lending
money.
External Users

1. Customers
• Main source of income of businesses; acquire goods and services
for a fee.
• Patrons, Clients, people acquiring goods or services of a company
for fee
• Whether or not to build relationship with the business to have any
dealings with the business
External Users

2. Creditors
• Providers of additional funds when the initial investment of owners is
exhausted; lend resources to businesses usually in the form of money
• Banks, Lending Institutions, Wealthy Individuals, sometimes the government
can also lend resources to a company
• Whether or not to lend resources to the business, try to see if the business
is not very risky before lending funds.
External Users

3. Potential Investors
• Providers of additional funds when the initial investment of
owners is exhausted; invest resources in the business hoping to
earn decent returns.
• Wealthy individuals, other business planning to invest
• Whether or not to invest in the business, primary concern is the
ability of the business to provide acceptable returns.
External Users

4. Government
• An external user whose primary role is regulate business; studies
financial statements to determine amount of taxes payable
• Different government agencies, Taxing Authorities, Government
Officials. (BIR, DOLE, SEC, DTI, MUNICIPALITY/CITY HALL, DENR,
etc.)
• Oversees business operations with the end goal of improving the
economy; Checks the accuracy of financial statements to compute
for the correct amount of taxes payable
External Users

5. Academe
• Uses accounting information primarily for academic purposes
• Professors, lecturers, students & researchers
• Uses accounting information in the teaching of accountancy;
researches loopholes & possible improvements in the field of
accountancy.
External Users

5. General Public
• Citizens & residence of the country even though they do not plan
to transact with the business; Use financial statement to gauge
the conditions of the economy
• Common people not connected with the company
• Concerned with the over-all performance of the economy; use
financial information to estimate economy performance.
Internal & External Users
• What kind of information do users need that can be answered
by accounting?
 Income or profit of the business
 resources or assets of the business
 liabilities or amount owed by the business to its suppliers
 taxes paid by the business
 salaries and other benefits paid to employees
• What decisions/questions of external users that are supported by accounting information?
 Potential Investors
• Is it profitable for me to invest in this business?
 Banks
• If extend a loan to this company, will it be able to pay this loan? Does this company have sufficient resources
to pay its loan?
 Suppliers
• Do I extend credit to this company? For how long?
 BIR
• Is the owner paying the correct taxes?
 DOLE
• Are the employees paid according to what the law states? Do they get the benefits required?
SUMMARY OF THE DIFFERENCES BETWEEN
INTERNAL AND EXTERNAL USERS

INTERNAL EXTERNAL
Primary Users Secondary Users
Who are involved in planning, organizing and Individuals or organizations outside a
running the business. company who are interested in its financial
information
Need more detailed Summarized /Not Detailed (Annual Reports)
information on a timely basis in order to
support their decisions
Answer

• Yes. The LGU will check whether you are paying your local taxes.
As required, businesses must have a business permit before they
are allowed to operate in the city or municipality. This is renewed
every year, with appropriate taxes paid. The local government
may review your accounting records to check whether you are
declaring or paying the correct taxes.

• “Are the officers of the Local Government Unit internal or

external users? Why?
Group Activity

• Two groups
• Act out internal and external users of accounting information
• To be able to present the information needs of the different users and
relate these information to their decision-making process
END