The financial statements provide useful information to its various users such as management, owners, investors, creditors, etc. The users of financial statements can be broadly classified as Internal Users and External Users.
- Internal Users: These are the users who have direct access to the financial statements of an organization and who are directly related to the business. For example, owners, management, employees, workers, etc. They require financial information in their decision-making process.
- External Users: These are the users who do not have any direct access to the financial statements of an organization but are interested in knowing the financial position of an organization. They need this information in order to judge the profitability and soundness of the business which helps them in making their investment decision.
External Users of Financial Statements
These are outside users who are interested in the financial affairs of a business. The following points describe the different motives of each of the external users and how financial statements are helpful for each of them.
Banks and other Financial Institutions: Banks provide finance in the form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency, and profitability to advance loans. The financial statements enable the banks and other financial institutions to access such information
Creditors: These are those individuals and organizations to whom a business owes money on account of credit purchases of goods and services. Hence, the creditors require information about the creditworthiness and liquidity position of the business.
Investors and Potential Investors: These are the parties who have invested or who are planning to invest in the business of an enterprise. Hence, in order to assess the viability and prospects of their investments, they need information about the profitability and solvency position of the business.
Tax Authorities: They are interested in knowing whether the number of sales, production, profits, revenues, etc. are correctly calculated and shown unambiguously in the books. This is very important so that appropriate and correct tax rates (of taxes such as sales tax, excise duty, etc.) are levied on the business. These authorities also evaluate whether the financial statements have been prepared in accordance with the legal provisions or not.
Government: It needs information to determine various macro-economic variables such as national income, GDP, industrial growth, etc. The accounting information assists the government in the formulation of various policies measures and to address various economic problems such as unemployment, poverty, etc.
Researchers: Various government, non-government research institutes, and other independent research institutions such as CRISIL, Stock Exchanges, etc. undertake various types of research projects. Correct information provided by the financial statements acts as an input for these research works and makes the research authenticate.
Consumers: Every business tries 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. The business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products. Thus, the unambiguous and transparent financial statements help in the repo-building of the business.
Public: The public is keenly interested to know the portion of the profit that a business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. Such type of information revealed by the financial statements helps in promoting the reputation and goodwill of an organization.
Revenue Income: Revenue incomes are those incomes that are earned in the conduct of ordinary and day-to-day business activities.
Capital incomes are those incomes that do not arise in the normal course of business operations. Such incomes arise from the capital itself, without involving any production work. For example, the premium received from the issue of shares or debentures.
The capital loss is made good or settled against the capital profits. In case the amount of capital losses is more than the capital profit, then the excess amount is shown on the Assets side