The owner reads the accounts, that much is clear. But why do the bank, the government and the staff all look at the same figures? Because accounts are not just a ledger. They are an information system, and the readers come in two camps.
1. Accounting is an information system
Accounting is called an information system. Transactions are written into the books and arranged as financial statements so that somebody can use them. While writing, the accountant keeps the needs of internal and external users in mind.
The books of accounts and the related statements are prepared by accountants. The accountant writes, and other people read.
2. The readers inside: internal users
Internal users are the individuals or groups within the organization who use accounting information directly to manage and develop the business.
The book names two groups. Owners and managers learn the amount and the change of profit, loss and financial position from the statements, then decide what to do next. Employees and workers look at job security and future prospects, whether salaries and bonuses are fair, and whether they can collect their rightful dues.
3. The readers outside: external users
External users are the individuals or organizations not directly involved in the daily activities of the business, who nonetheless use the financial statements to make decisions. In the book's triangle figure the top reads users of accounting information, and the two faces below carry these two groups. Tap to match each description to its face.
the book's triangletap a description
Which face of the triangle?
The top: users of accounting information. That is why accounting is an information system. The readers split into two faces.
Internal users. People or groups inside the organization who use the figures directly to manage and develop the business.
External users. Not directly in the daily work, but they read the financial statements and decide.
All three seen. There is one dividing line: whether they take part directly in the daily work.
Drawn by hand after the book's figure, not to scale.
The book's four external examples. A loan provider analyzes the accounts before lending, to see whether the borrower can pay the loan back. The government examines the accounts to check that duty, VAT, tax and income tax are being collected and paid properly.
Accounts payable, the suppliers who sell on credit, check before a credit sale whether the buyer will be able to pay the dues. An investor wants to know the financial condition, the ability to earn profit and the safety of the invested money before putting money in.
One statement, many readers. Pick one: are they inside the firm or outside, and which lines of the statement do they read?
who reads whatpick a reader
The statement's readers
Now match who looks and why, cell by cell.
gridtap a cell
Who looks, and why?
user
what for
owners and managers
profit-loss, future plans
employees and workers
job security, pay, rightful dues
loan providers
ability to repay
government
duties, VAT, taxes
accounts payable
ability to pay dues
investors
position, earning power, safety
Internal. They learn the amount and change of profit, loss and financial position from the statements, and plan what to do next.
Internal. To judge job security and future prospects, whether pay and bonus are fair, and to collect rightful dues.
External. Before lending, it reviews the accounts to see whether the borrower can pay back.
External. To make sure duty, VAT and taxes are collected and paid properly.
External. To check, before a credit sale, that the buyer can pay the amount due.
External. To know the financial condition, earning ability and safety of the money before investing.
The book’s “besides” line adds more names: auditors, consumers, suppliers, trade unions, business associations, the general public, mass media, analysts and market researchers. They use accounting information too.
4. Sort them out
Ten users. For each, ask one thing: is this person directly in the daily work or not?
sort themchip, then box
Who is internal, who is external?
Pick up a chip, then drop it in a box.
Right. Next one.
Not yet. Ask whether this person takes part directly in the daily work of the business.
All in place. In the book, owners, managers, employees and workers are internal. Loan providers, the government, accounts payable and investors are external, and so is the auditor from the “besides” line.
Two cards to pin down two external users.
cut from the notetap to turn over
Know the user
QuestionWho checks the ability to repay before lending?
AnswerLoan providers
QuestionWho checks the ability to pay dues before credit supply?
AnswerAccounts payable (suppliers)
5. Check yourself
Three questions, starting with the first.
check yourselfpick one answer
Question 1
By what name is accounting referred to?
'Accounting system' is not the book's name; the book calls accounting an information system.
Right. The book says accounting is referred to as an 'information system'.
Auditing is a separate task; accounting's name is information system.
'Statement system' is not in the book; the name is information system.
Now the second.
check yourselfpick one answer
Question 2
Who is an external user of accounting information?
The owner is an internal user who directly runs the business.
The manager is an internal user, involved in daily work.
Right. The tax authority is not in daily work and checks from statements whether tax is paid properly.
An internal auditor works inside the organization; the book's external examples are outside parties such as the government's tax authority.
In the last one, keep the inside and outside split in mind.
check yourselfpick one answer
Question 3
What are those called who are not directly involved in the daily activities of a business but use its financial statements to make decisions?
Right. By the book's definition these are external users.
Internal users use accounting information directly for management and development.
Accountants prepare the accounts and are not outside decision-makers.
Managers are directly involved in running the business.
The whole note on seven cards.
cut from the notetap to turn over
Seven cards
QuestionBy what name is accounting known?
AnswerInformation system
QuestionWhich users use accounting information directly for business management and development?
AnswerInternal users
QuestionWhich users are not directly involved in daily activities but use statements to decide?
AnswerExternal users
QuestionWhich type of user are employees and workers?
AnswerInternal users
QuestionWhich user checks whether duties, VAT and taxes are collected and paid properly?
AnswerThe government
QuestionBefore supplying goods on credit, what do suppliers (accounts payable) check?
AnswerThe buyer's ability to pay its dues
QuestionWhich three things does an investor want to know before investing?
AnswerFinancial condition, ability to earn profit and security of invested money
Source: Accounting, Classes 9-10 (NCTB), Chapter 1 “Introduction to Accounting”, the “Users of accounting information” part.