6.4 Interested parties
Accounting information is crucial for a variety of stakeholders, each with specific needs and interests. Understanding who uses this information and for what purposes is fundamental to grasping the role of accounting in business and society.
1. Owners
Definition: Owners are individuals or entities that have invested capital into the business and hold ownership stakes.
Uses of Accounting Information:
Profitability Analysis: Owners use financial statements to assess whether the business is generating enough profit.
Return on Investment: They evaluate the efficiency of their investment by looking at metrics like Return on Capital Employed (ROCE).
Decision-Making: Based on financial health, owners decide on reinvestment, expansion, or withdrawal of funds.
Example: An owner may look at the profit (net profit)margin to determine if the company’s profitability aligns with their expectations.
2. Managers
Definition: Managers are responsible for running the business and making day-to-day operational decisions.
Uses of Accounting Information:
Performance Measurement: Managers use financial reports to monitor and evaluate departmental performance.
Budgeting: Managers rely on accounting data to prepare budgets and forecast future financial performance.
Strategic Planning: Long-term strategies are developed based on the analysis of financial trends and ratios.
Example: A manager might analyze cash flow statements to ensure the company can meet its short-term liabilities.
3. Trade Payables
Definition: Trade payables are suppliers or creditors to whom the business owes money for goods or services received.
Uses of Accounting Information:
Creditworthiness Assessment: They review financial statements to determine the company’s ability to pay debts.
Payment Terms: Decisions on extending credit terms or requiring upfront payments are based on financial health indicators.
Example: A supplier might examine the current ratio to gauge the business liquidity before agreeing to a payment plan.
4. Banks
Definition: Banks provide loans and other financial services to businesses.
Uses of Accounting Information:
Loan Approval: Banks assess financial statements to decide on loan approvals and the terms of the loan.
Risk Assessment: They analyze the solvency and liquidity ratios to evaluate the risk associated with lending.
Example: A bank would look at the debt-to-equity ratio to understand the company’s financial leverage before granting a loan.
5. Investors
Definition: Investors are individuals or institutions that provide capital with the expectation of financial returns.
Uses of Accounting Information:
Investment Decisions: They use financial data to decide whether to buy, hold, or sell their investments.
Performance Tracking: Investors monitor financial statements to track the performance of their investments over time.
Example: An investor might use earnings per share (EPS) to assess the profitability per share of the company.
6. Club Members
Definition: Club members are individuals who belong to non-profit organizations such as sports clubs or social clubs.
Uses of Accounting Information:
Membership Fees: They want to ensure that their fees are being utilized effectively.
Financial Health: Members review financial reports to ensure the club is solvent and can continue to provide services.
Example: Club members might look at the club’s income & expenditure account to see how membership fees are being spent.
7. Other Interested Parties (Governments, Tax Authorities, etc.)
Definition: These are external entities that have an interest in the financial information of the business for regulatory, tax, and economic purposes.
Uses of Accounting Information:
Tax Calculation: Tax authorities use financial statements to determine the amount of tax payable or due.
Regulatory Compliance: Governments ensure businesses comply with financial regulations and standards.
Economic Planning: Economic bodies use aggregated financial data for macroeconomic planning and analysis.
Example: Tax authorities will review the company’s financial records to ensure accurate tax reporting and compliance.
Practice Question
Question: Identify and explain three ways in which managers use accounting information for decision-making.
Answer:
Performance Measurement: Managers use financial reports to compare actual performance against targets, identifying areas needing improvement.
Budgeting: They rely on historical financial data to create budgets, ensuring resources are allocated efficiently.
Strategic Planning: Financial trends and ratio analysis help managers develop long-term strategies for growth and sustainability.
