What is accounting information? Who are the user of accounting information and why do they need such…

Accounting information is the financial information produced by the process of identifying, measuring, recording, classifying, summarizing, analyzing and interpreting financial transactions and communicating the results to interested persons. It is designed to meet the common information needs of decision makers — decisions such as buying, holding or selling shares, and judging the company's ability to pay employees, determine distributable profit and regulate its activities. Its users are broadly classified into internal users (various levels of management) and external users.

Internal users:

1. Board of Directors (BOD): the top level of management, elected at the Annual General Meeting. It needs accounting information to formulate short-run and long-run plans and policies, none of which is possible without it.
2. Managers: those who implement the policies and strategies set by the BOD. They need reliable information for all managerial functions so that economic and non-economic resources are utilized effectively, and to review short-term and long-term solvency, judge profitability in terms of turnover and investment, and decide future courses of action.
3. Accountant and others: the accountant deals with all business activities, recording and processing them; business consultants and legal advisors also require the information for their work.

External users:

1. Investors/shareholders: as chief providers of capital, they want to know the return from their investment and the associated risk. Being the real owners, they look for good profitability, sound financial position and high cash inflow, and decide on that basis whether to continue or drop their shareholding; potential investors need it to judge prospects.
2. Lenders: banks, financial institutions and debenture holders are the main suppliers of debt capital. They need information on the borrower's financial stability to decide whether the loan and interest can be repaid, to fix security and interest rate, and to monitor the borrower's condition. Short-term lenders (trade creditors) need to know whether amounts owed will be paid on the due date and whether to extend, maintain or restrict credit.
3. Suppliers: those who provide physical and non-physical services rely on the company's performance to decide on supplying goods on credit, to judge the possibility of bad debts, and to make provision for it.
4. Rating agencies and security analysts: equity analysts, bond analysts and credit rating agencies use the information to answer queries on television, publish trends on a particular stock in business newspapers, and speak at seminars and interviews. They also obtain valuable information through face-to-face meetings with company officials, premises visits and constant enquiry, and companies build rapport with them to gain market visibility.
5. Employees and trade unions: employees want to know the general health of the organization in terms of stability and profitability since their compensation depends on financial performance. Potential employees use it to check future prospects, and trade unions use financial reports to negotiate wage packages, bonus declaration and other benefits.
6. Customers: they are interested in the continuation of the company, especially where they have long-term involvement or dependence — for example, car owners and buyers of electronic goods depend on the manufacturer for warranty service support and continued supply of spare parts.
7. Government and regulatory agencies: they need the information to regulate company activities and to decide when tax laws need amending to support lagging industries. Regulatory agencies act against firms that do not file returns on time or fail to show a true and fair position, and stock exchanges (NEPSE in Nepal) have a legitimate interest in the reports of publicly held enterprises to ensure efficient capital market operation.
8. Tax authorities: they need the information to assess the tax to be imposed and to check whether the company is evading tax.
9. The public: every company has a social responsibility and depends on the local economy. It may get patronage from local government as capital subsidy, cheap land or tax holidays; published financial statements assist the public by providing information about trends and recent developments, and about pollution control, product safety and treatment of local suppliers.

Why the information is needed — the underlying reasons:

1. For decision making: every user group faces a decision — buy/hold/sell, lend/refuse, supply on credit/refuse, join/leave, tax/subsidize — and accounting information is the common basis for all of them.
2. For accountability and stewardship: management is accountable to shareholders and to society, and financial statements are the means by which it renders that account.
3. Because accounting is the language of business: it is the only standardized medium through which the financial health of an entity is communicated, prepared on GAAP so that it is understandable, relevant, reliable and comparable across firms.

Thus, accounting information serves as the common basis on which both internal and external users judge the profitability, solvency and prospects of a business and take their respective decisions.