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.
Internal Users of Financial statements
The owners, management, employees, and other workers are the internal accounting users who are directly related to a company. The following points describe the different motives of each of the internal users and how financial statements are helpful for each of them.
Owners: The owners are interested in the profit earned or loss incurred during an accounting period. They are interested in assessing the profitability and viability of the capital invested by them in the business. The financial statements prepared by the business concerns enable them to have sufficient information to assess the financial performance and financial health of the business.
Management: Management is an integral part of an organization. They are interested in planning, decision-making process, evaluating past performances, etc. The financial statements enable the management not only in drafting policies, measures, and planning but also inefficient implementation of the plans. With the help of the financial statements, management can not only enhance the efficiency of the business but also exercises various cost controlling measures to remove inefficiencies.
Employees and Other Workers: They are interested in the timely payment of wages and salaries, bonuses, and appropriate increment 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 help them to assess their individual career scope and their growth prospects.
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