The Context and Purpose of Accounting

The accounting function plays a critical role in meeting the needs and expectations of organisations, stakeholders, and society as a whole. The context and purpose of the accounting function can be understood by considering the various users of accounting information and their information needs.



  1. Internal 

Management: Accounting information provides significant support to management in the planning, control, and decision-making process. Additionally, management requires accounting information to assess the performance and position of the organisation and implement appropriate measures to enhance business outcomes. Furthermore, accounting information is beneficial in enabling managers to perform their responsibilities effectively (Siddiqui, 2015).

Employees: Employees utilise accounting information to evaluate the financial well-being, sales volume, and profitability of the organisation in order to assess their job security, future pay and benefits, and potential for career advancement (Siddiqui, 2015).

Owners: Owners rely on accounting information to evaluate the feasibility and profitability of their investments. Accounting information facilitates the owners in assessing the capacity of the business organisation to pay dividends and aids in determining the appropriate course of action for the future (Siddiqui, 2015).

  1. External

Creditors: Creditors find accounting information valuable as it helps them to evaluate the creditworthiness of the business. The financial health of the business determines the credit terms and standards, and creditors, including suppliers and lenders such as banks, analyse accurate information accordingly. Trade creditors typically require accounting information for a shorter period than lenders (Siddiqui, 2015).

Investors: Investors require information as they are interested in the risk involved in investing and the potential returns. As it is crucial to evaluate the feasibility of investing in the company, they must analyse the information before committing any financial resources to the organisation (Siddiqui, 2015).

Customers: Customers are interested in accounting information to evaluate the financial standing of a business, particularly when they have a long-term relationship with the organisation, as this helps them to ensure a consistent source of business (Siddiqui, 2015).

Regulatory Authorities: Regulatory Authorities require accounting information to ensure that it complies with rules and regulations and safeguards the interests of stakeholders who rely on such information (Siddiqui, 2015).


References

Siddiqui, F. (2015), “The users of accounting information and their needs”, Linkedin, available at: https://www.linkedin.com/pulse/users-accounting-information-needs-fareed (accessed 5 April 2023).





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