Accounting (Post Mid-Year Exam)

Remedial Handout 2: Definition, Functions of Accounting & its Different Users

Definition of Accounting
Accounting is a systematic process of identifying, recording, measuring, classifying,
verifying, summarizing, interpreting and communicating financial information. It
reveals profit or loss for a given period, and the value and nature of a firm's assets,
liabilities and owners' equity.

Purpose/ Functions of Accounting:

1. Establishes accountability: Accounting information analyses how money

was used in a financial year. It enables a business owner to account for his/her
decisions.

2. Communicates financial information to various users – Accounting

information is used to communicate business information expressed in monetary
terms to users. Accounting information may contain tables, graphs, charts to help
basic people to understand.

3. Helps in business decision making – Accounting information helps to

measure and evaluate the performance of the business by producing and filing
financial records. These records allow managers to make informed decisions
based on the reports.

4. A control device for the management – Accounting information enables

management to make sure/direct/regulate business activities so that they go
according to business plan/budget or objectives. It helps to evaluate
sections/departments within the business to see if they are working effectively in
achieving the planned budget or objectives.

5. Helps interested parties to make useful decisions – Accounting allows for a

business to prepare simple and brief reports called financial statements that
would help interested parties like investors or customers to make relevant
decisions about their relationships with the business.

6. It is a business language – Accounting serves as business language that

makes it easier for people to understand the financial affairs of an organization.

Users of Accounting Information

There are two groups of users of accounting information:

1. Internal Users: these are groups who have direct access to the business’s “books” or
accounting records. They can also request for Special Purpose Financial Reports
[SPFRs] and have access to internally generated management reports.

2. External Users: these groups rely on General Purpose Financial Reports [GPFRs] to
make decisions and they do not have direct access to accounting records of the

Prepared by Ms. Janice Baltor, 2023

Accounting (Post Mid-Year Exam)

business. Some influential stakeholders may be able to obtain SPFRs tailor made to suit
their needs.

1. Internal Users
a. User: The internal users include the management or the owners of the
firm/business.
Reason: They want to evaluate the performance of the business to help them in
effective planning and control of business activities.

2. External Users
External User Definition Reason
Shareholders These are people who buy shares in a They want to evalute the performance of
company the business to help them in effective
planning and control of business
activities.

Investors These are people who have They are interested in the rate of
contributed capital [money] in the return [profit] on their investment.
business.

Lenders (banks) These are people or institutions that They want to assess whether the
give money to the business as loans. businesses have ability to pay back
the loans.

Suppliers/ These are people/businesses to They want to assess the credit

Creditors whom firm owes money to. worthiness of the firm.

Customs Inland The government is the main  It needs taxes to operate

Revenue regulating authority in the nation
(Government) and the CIR is the main tax
collector for the govt.
efficiently [in providing its
services to the
people]. Therefore, it is interested
in whether or not the firm is
paying
its fair share taxes (VAT).
 To see if the business is
paying its tax returns.

Employees These are people who work in the  They want to see if the firm
firm. makes profits which will
mean
a better wage for them and also
guarantee a secure job for
them.
 To ensure that business
provides wages on time and
good working conditions.

Management Those who manage and direct the  To evaluate the performance
business. of the business so that they
can implement control, plan
and maximize decisions

Prepared by Ms. Janice Baltor, 2023

Accounting (Post Mid-Year Exam)

according to the running of

the business.
Customers/Public These are people/entities that They want to see if the business will
buy goods and services from the continue to provide/produce the
firm. goods and services they need/want.

Competitors They want a greater market share.

These are entities that are also
carrying out similar business
activities.

Prepared by Ms. Janice Baltor, 2023