External Users of Accounting Information

External users are individuals or entities that are not directly involved in a company's operations but are interested in obtaining information about its financial performance. Two external users directly concerned with accounting information are:

1. Investors:
Investors are external users who provide capital to a company in exchange for ownership shares. They are interested in obtaining accounting information to evaluate the company's financial health and determine whether to invest or divest their capital. Investors use financial statements, such as the balance sheet, income statement, and cash flow statement, to assess a company's profitability, liquidity, and solvency.

2. Creditors:
Creditors are external users who lend money to a company and expect repayment with interest. They are interested in obtaining accounting information to assess the company's ability to repay the loan. Creditors use financial statements to evaluate the company's creditworthiness, liquidity, and financial stability.

Importance of Accounting Information for External Users

Accounting information is essential for external users to make informed decisions about investing or lending capital to a company. The importance of accounting information for external users can be explained as follows:

1. Helps in decision-making:
Accounting information provides investors and creditors with the necessary data to make informed decisions about investing or lending capital to a company. This information helps them to evaluate the company's financial health and determine whether it is a good investment or lending opportunity.

2. Improves transparency:
Accounting information improves transparency by providing external users with accurate and reliable financial information. This information helps them to understand the company's financial performance, identify potential risks, and make informed decisions.

3. Facilitates communication:
Accounting information facilitates communication between a company and its external users. It provides a common language for communicating financial information, which helps to build trust and confidence in the company's financial reporting.

Conclusion

In conclusion, investors and creditors are two external users directly concerned with accounting information. They use this information to evaluate a company's financial health and make informed decisions about investing or lending capital. Accounting information is essential for external users as it helps them to improve transparency, facilitate communication, and make informed decisions.

External users (Secondary Users) of accounting information include the following:

1. Creditors:-
For determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks.
2. Tax Authourities:-
For determining the credibility of the tax returns filed on behalf of the company.
Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company.
3. Customers:-
For assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.
4. Regulatory Authorities:-
For ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.