Accounting Information

We all know that accounting may be a process of providing relevant accounting information to its users. In short, it’s a channel between the business and its various users. Before providing the information to its users, accounting first records, classifies, summarises, and analyses the business transactions.

That is it begins with identifying the financial transactions and ends with preparing the financial statements of a business. The financial statements basically consist of Trading Account, Profit and Loss Account, and the Balance Sheet. During the entire process of accounting, certain information and facts are generated which can be useful for its users.

This information is considered as accounting information that needs to be exchanged between a business and its users. Thus, accounting information is often defined as data and facts produced or revealed by the financial statements of a business. This information is usually available within the sort of financial statements, financial reports, etc.

The accounting information may be required by its users for meeting their numerous individual needs.

Categories of Accounting Information

The accounting information can be broadly categorized into the following three categories.

Information Regarding Profit or Loss: Mostly the users of financial statements are interested in knowing the profits or losses of a business. This information of profits or losses of the business is revealed through the Trading and Profit and Loss Account of a firm. Companies prepare Statement of Profit and Loss which is prescribed in the Schedule VI of the Companies Act, 1956 whereas, Income and Expenditure Account is prepared in case of a Not-for-Profit Organisation to ascertain profits or losses. These statements show the net results of the operating activities of a business.

Information Regarding Financial Position: Financial position is another information that is important for the users of financial statements. The financial strengths and weaknesses of a business are revealed through the record. In this statement, the varied assets and liabilities of a business are shown.

Information Regarding Flow of Cash: The Cash Flow Statement shows both inflows and outflows of cash during an accounting period or a specific period. This information is of great importance in the business as it helps in knowing its actual cash position. Such information is revealed through the Cash Flow Statement of business. Various important decisions of a business depend on the availability of cash.

Users of Accounting Information

There are various parties or users who are interested in the business of an enterprise and require accounting information. These users can be bifurcated into two categories as Internal Users and External Users.

Internal Users

These are the users who are internal to an organization. Such users have straight access to the financial statements of a business. The following users are included within the category of internal users.

Owners: These are the persons who make investments in the business. These have an interest in knowing the profit earned or loss incurred during an accounting period. They are curious about assessing the profitability and viability of the capital invested by them within the business. The financial statements developed by the business concerns enable them to have sufficient information to assess the financial status and financial health of the business.

Management: Management is an integral part of an organization. They are nourished in drafting plans, decision-making process, evaluating past performances, etc. The financial statements enable the management not only in drafting policy measures and planning but also inefficient implementation of the plans. With the help of information revealed by the financial statements, management can not only enhance the efficiency of the business but also exercise various cost-controlling measures to remove inefficiencies.

Employees and Workers: They are interested in the timely payment of wages and salaries, bonuses, and appropriate increments in their wages and salaries. With the help of the financial statements they can know the amount of profit earned by the company and can demand a reasonable hike in their wages and salaries. The financial statements also assist them to assess their individual career scope and their growth prospects.

External Users

External users are those that are outsiders to a corporation and have an interest in the financial affairs of the business. These users don’t have direct access to the financial statements of the business. The following parties come under the top of external users.

Banks and Financial Institutions: Banks provide finance to varied businesses within the sort of loans and advances. Thus, they have information regarding liquidity, creditworthiness, solvency, and profitability to advance loans. The accounting information revealed through the financial statements of business enable them to have access over such information.

Investors and Potential Investors: These are the parties who have invested or are planning to invest in the business of an enterprise. They are interested in knowing the safety of their investment in the business and the regularity of returns on their investments. Hence, so as to assess the viability and prospects of their investments, they have information about the profitability and solvency position of the business.

Creditors: These are the parties to whom a business owes money on account of credit purchases of goods and services. Hence, creditors require accounting information to enquire about the creditworthiness and liquidity position of the business.

Tax Authorities: They need accounting information to know whether the number of sales, production, profits, revenues, etc. are correctly calculated and shown unambiguously within the books. This is vital in order that appropriate and proper tax rates (of taxes like nuisance tax, excise duty, etc.) are levied on the business.

Government: Government requires information to determine various macroeconomic variables such as national income, GDP, industrial growth, etc. The accounting information assists the govt within the formulation of varied policy measures and to deal with various economic problems like unemployment, poverty, etc.

Consumers: Every business attempts to build up a reputation in the eyes of consumers, which can be created only by supplying better quality products and post-sale services at reasonable and affordable prices. Businesses that have transparent financial records, assist the customers in knowing the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products. Thus, unambiguous and transparent financial statements help in building a business reputation.

Researchers: Many research organizations like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake a number of research projects. The accounting information eases their research work.

Public: The public is keenly interested in knowing the proportion of profit that the business spends on various public welfare schemes; for example, making charities, funding schools, etc. This information is revealed by the financial statements of a business.

Qualitative Characteristics of Accounting Information

The accounting information revealed through the financial statements of a business is useful and valuable only when it shows a true and fair view of the business activities. In order to depict the true and fair picture, accounting information should have the following characteristics.

Reliability: Accounting information should be authentic in such a manner that its users can completely depend on such information. All accounting information should be verifiable and will be verified from the source documents (vouchers) like cash memos, bills, etc. Hence, the available information should be impartial and free from any errors and ambiguity.

Relevance: The users of accounting information need relevant information for effective decision making, planning, and predicting future conditions. For this, it’s necessary that the essential and appropriate information is definitely and timely made available to its various users. Any unrelated and useless information should be avoided.

Understandability: Accounting information should be presented in such a way that every user is able to understand and interpret the information without any trouble in a meaningful and appropriate manner.

Comparability: it’s the foremost important quality of accounting information. Comparability express accounting information of a current year can be compared with that of the previous years. Comparability enables intra-firm (i.e. within an organization) as well as inter-firm (i.e. with other organizations) comparison. It assists in assessing the outcomes of various policies and programs adopted in different time horizons by the same or different businesses. Further, it helps to determine the expansion and progress of the business over time and as compared to other businesses.

Also, Read Bookkeeping