What are the differences of external users from internal users of accounting information?

Accounting is the language of business, it brings life to the otherwise lifeless business activities. It acts as a bridge between users of the information and the day to day transactions that occur inside a business. Users of accounting information may be inside or outside a business.

Qualitative characteristics of accounting information such as identifying, measuring, recording and classifying financial transactions help businesses with decision making, analysis, target setting, budgeting, pricing, forecasts, etc.

There are primarily two types of users of accounting information;

Internal users (primary users) – If a user of the information is part of the business itself then he/she is considered as one of the internal or primary users of accounting information. 

For example, management, owners, employees, etc. The branch of accounting which deals with internal users is called management accounting.

External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information.

For example, potential investors, lenders, vendors, customers, legal and tax authorities, etc.

Internal Users of Accounting Information – (Primary)

Following are the primary users of accounting information:

1. Management – Organization’s internal management includes all junior and senior business managers.

2. Owners/Partners – Owners are the legal stakeholders of the business and the ultimate signing authority.

3. Employees – Full-time & part-time workers. They are essentially on the company’s payroll.

Related Topic – What is the Accounting Equation?

External Users of Accounting Information – (Secondary)

Following are the secondary users of accounting information:

1. Investors – They may be current investors, minority stakeholder, potential future investors, etc.

2. Lenders – Banks and Non-banking financial companies which provide loans in the form of cash or credit are termed as lenders.

3. Regulatory and Tax Authorities – Regulatory bodies such as the stock exchange & authorities include the govt. along with various statutory and tax departments.

4. Customers – Are buyers of goods or services and may exist at any stage of a business cycle. They may be producers, manufacturers, retailers, etc.

5. Suppliers – Are the sellers of goods and services.

6. Public – The general public is also among users of accounting information. They are keen to know the financial health of a business to get a fair idea of the firm’s niche market, business environment, and economic atmosphere of the country.

Short Quiz for Self-Evaluation

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What is difference between external and internal users of accounting information?

What are internal and external users?

What are the differences between internal reports and external reports generated by the accounting information system?

Which external and internal users benefit the most from accounting information?