In this article, we will learn in-depth about the top internal and external users of financial statements and much more.
Users of Financial Statements
A business entity involves a large number of stakeholders. All of them use financial statements. Parties in today’s business world use a variety of financial statements to meet their specific needs.
Users of financial statements are as follows:
1.Internal Users:
Internal users are internal parties of the organization. E.g., owners, management authority, internal auditor, and account department officials.
Owners:
The owners are the first to be mentioned among the internal users of financial statements.
To make a profit, the owner invests the necessary capital in the business. As a result, they are naturally interested in information about their areas of interest, such as how profitable the business is, whether capital is being used properly, whether to take out a loan, what the status of property liabilities is, and so on.
For small businesses or sole proprietorships, this is normal. They have the right to receive and use the financial statements of the business first.
When it comes to a joint venture company, the situation is a little different. According to the Entity Concept, the owners or shareholders of the company have been identified as separate entities from the business entity.
So, in this case, many business owners or shareholders consider external users of financial statements.
The question remains – the business entity and the owner or shareholder may be separate entities.
However, there may be no restrictions on the use of their financial statements by internal users because their rights in the business’s internal affairs are free and priority. Their location is distinct from that of external users.
Management Authority:
The business is run by the board of directors, which the company’s shareholders elect. They are given broad rights, responsibilities, and authority in order to conduct business. As a result, managers require different types of information in order to run their businesses effectively.
When planning, making decisions, implementing plans, formulating policies, and performing other functions, they use various accounting information from financial statements.
Accounting Department:
From the recording of financial transactions to the finalization of financial statements, the Accounting Department is responsible for all functions related to preparing and finalizing financial statements.
In this regard, the middle and senior officers of this department regularly use the accounts and financial statements of the past different years.
As a result, the Internal Accounts Department can be considered the first category user of financial statements in internal accounting work.
This department assists management in making business decisions in a variety of ways by providing interim accounting information.
Internal Auditor:
Large corporations set up internal audit departments outside of the accounting department to ensure financial transparency and accountability.
All other departments’ financial transactions are audited by this department’s honest and dedicated staff and officers.
This ensures that the financial transactions of officers and employees at all levels are transparent and accountable.
Internal audit work frequently involves using various types of financial statements, accounts, and books by the auditor.
2. External Users:
External users of financial statements are considered as a third party to the business. Creditors, lenders, investors, potential investors, government, Tax authorities, external auditors, officials-employees, trade unions of industrial and commercial associations, researchers, and consultants are considered external accounting information users.
Creditors:
Almost every company now sells products on a credit basis. In this case, before selling goods on credit, a seller must consider the buyer’s financial situation and ability to pay the debt.
They make decisions based on the data in financial statements.
Lender:
Borrowing is required to resolve a business’s financial crisis. Different individuals or organizations provide these loans in exchange for interest.
Before making the loan, the lender will analyze the various details of the borrowing institution’s financial statements to ensure that the borrower will repay the interest and the loan amount on time.
Investors:
Banking Institutions, insurance companies, and other financial institutions or investors scrutinize an institution’s financial statements before investing.
They invest in a company if they see in the review that the lending is safe, the dividend rate is relatively high, and the return on investment is available at the end of the term.
Future or Potential Investors:
Future or potential investors are those who decide to invest in a company in the hopes of making a profit or receiving a dividend in the future but have not yet done so.
If they want to invest in a company, they will first look at the investment’s security and profitability.
They will do so by reviewing the company’s financial statements and making an investment decision.
Government:
The government must formulate the country’s industrial policy, trade policy, import-export policy, and other policies to run the state efficiently.
Various government departments and ministries can obtain the necessary information by reviewing various business financial statements and reports to formulate these policies. They can then announce and implement the appropriate government policies.
Tax Authorities:
The government imposes a value-added tax, sales tax, income tax, import duty, export duty, and other taxes on traders and industrialists and resolving tax disputes.
As a result, the government is interested in learning about the traders’ income-expenditure, import-export, production, distribution, and other financial data.
The government’s tax authorities examine traders’ financial statements, regulate their appropriate functions, and resolve tax and tax-related issues.
External Auditors:
Certified accountants and their audit firms are external auditors appointed by statutory provisions in joint venture companies, co-operative businesses, private companies, partnership businesses, banks, and insurance companies.
External auditors use financial statements to advise owners and management authorities on the accuracy, error, fraud, and forgery of the accounts prepared by the companies and submit audit reports in the interest of the owners, shareholders, and all parties involved.
Employees:
Employees and officers constantly work to increase the organization’s work activity, improve its reputation, and make money.
Their livelihood is one of the primary drivers of increased sales revenue and profit.
They must rely on various accounting information in the organization’s financial statements to receive fair credit for their improved performance.
The income statement shows increased production and sales revenue and increased profit figures, which aids them in their partnership or fair payments.
Chamber of Commerce and Industry:
The Chamber of Commerce and Industry uses various accounting information from their subordinate institutions’ financial statements to determine its overall commercial situation.
They also use financial statements to protect the association’s interests and formulate necessary policies.
Trade Unions:
Workers are the lifeblood of any business. Workers in third-world countries are routinely denied their fair piece of the profits.
Their hard-won profits help them gain a larger share of ownership and prosperity. Owners never pay their fair dues under factory and labor laws.
As a result, the information gathered from the organization’s financial statements, i.e., the increased profit serves as a reliable vehicle for negotiating the workers’ minimum wage, fair payment of human living dues, and claim collection.
Researchers:
Researchers conduct research and evaluation work on the management and accounting system of the organization.
Financial statements give a complete picture of a company’s financial situation, which aids researchers in realizing the truth and conducting product research.
Consulting firm:
Consulting firms or advisers are hired in the hopes of receiving practical advice on identifying and overcoming business and management weaknesses in order to survive in the face of competition.
This consulting firm examines the firm’s financial statements, identifies weaknesses, and proposes solutions so that the firm emerges and survives in its glory.
In the light of the above discussion, it can be said that financial statements are not only for accountants but also for people from all walks of life.
You can also read:
- The Purpose of Financial Statements
- Top 9 Limitations of Financial Statements
- Short Questions & Answers-Financial Statements
- Everything about Income Statement
