Question

How is a fund classified that accounts for governmental services that have both internal and external customers? Explain.

Answer 1

Users of accounting are both internal and external to the organization.

Internal Users of Accounting

Internal users are the primary users of accounting.

Following are the 3 types of internal users and their information needs:

1) Owners

Owners need to assess how well their business is performing.

Financial statements provide information to owners about the profitability of the overall business as well as individual products and geographic segments.

Owners are also interested in knowing how risky their business is.

2) Managers

Managers need accounting information to plan, monitor and make business decisions.

Managers need to allocate the financial, human and capital resources towards competing needs of the business through the budgeting process.

Preparing and monitoring budgets effectively requires reliable accounting data relating to the various activities, processes, products, services, segments and departments of the business.

3) Employees

For the employees operating in the finance department, using accounting information is usually part of their job description. This includes for example preparing and reviewing various financial reports such as financial statements.

Employees are interested in knowing how well a company is performing as it could have implications for their job security and income.

Many employees review accounting information in the annual report just to get a better understanding of the company’s business.

External Users of Accounting

External users are the secondary users of accounting.

Following are the 4 types of external users and their information needs:

1) Investors

Investors need to know how well their investment is performing. Investors primarily rely on the financial statements published by companies to assess the profitability, valuation and risk of their investment.

2) Suppliers

Just like lenders, suppliers need accounting information to assess the credit-worthiness of its customers before offering goods and services on credit.

Some suppliers only have a handful of customers. These customers could be very large businesses themselves. Suppliers need accounting information of its key customers to assess whether their business is in good health which is necessary for sustainable business growth.

3) Customers

Most consumers don’t care about the financial information of its suppliers.

Industrial consumers however need accounting information about its suppliers in order to assess whether they have the required resources that are necessary for a steady supply of goods or services in the future. Continuity in supply of quality inputs is essential for any business.

4) Auditors

External auditors examine the financial statements and the underlying accounting record of businesses in order to form an audit opinion.

Investors and other stakeholders rely on the independent opinion of external auditors on the accuracy of financial statements.