Management Accounting Need for Economic Information: Internal and External
Basically, there are two kinds of users of economic information of a business enterprise;
Also, Read Management Accounting Need for Economic Information.
External Users of Economic Information
External stakeholders include stockholders, creditors, tax authorities, supplies, customers, and employees. These parties need the financial information for their stake in the firm. For example, shareholders want to know the position of profits or losses and the net worth of the firm. Creditors want to know whether the firm will be able to pay its loan and interest or not. Tax authorities want to know the taxable incomes and the allowable expenses of the business. Customers want to know whether the firm will sustain itself in the future. As most of the firms sell their products with a free repair warranty and the product’s effect guarantee basis, all these warranties and guarantees will remain valid only if the seller firm exists there. Customers do not prefer to buy the product of a firm that cannot be expected to survive for long as no case can be filed for compensation against the liquidated firm.
Financial information about a firm including its income, expenses, assets, liabilities, and equities is communicated in the form of basic financial statements, such as the income statement, the statement of retained earnings, the balance sheet, and the cash flow statement, etc. Financial accounting has the primary responsibility of preparing all these financial statements. Precisely speaking, financial accounting provides economic information to outsiders.
Internal Users of Economic Information
Management accounting provides economic information to the internal management of a firm. Internal management or insiders include the top-level and middle-level management of the firm including the board of directors, the chief executive officer, the general manager, deputy general managers, departmental managers, and other line authorities, who are involved in the process of planning, decision making, and controlling. Therefore, management accounting is a staff function in an organization- a function that serves the managers by providing the relevant economic information to make better profit plans, better decisions, and effective cost control.
The core purpose of management accounting is to assist the strategic management team in making the plans and decisions more purposeful.
The position of management accountant is very important and diversified in the firm with respect to the information. A management accountant knows more about the function of the business than anybody else. The management accountant not only gathers the information but also keeps an eye on things happening outside the firm, in the business world. Gathering information is not the only work he must analyze; he also breaks it down into meaningful categories. They should evaluate the information on the basis of its importance to the management. After evaluating they should report it to the management so that it helps in decision-making.
In pursuing an organization’s goals, managers engage in basic activities such as planning, decision-making, and controlling. For all of these management activities, managers need information. The information comes from various sources, including economists, financial experts, marketing and production personnel, and other intelligence. Management accountants gather this information, process it, and supply the relevant information as input for management planning, decision-making, cost management, and cost control.
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Management Accounting two kinds of users of economic information of a business enterprise:
1. External Users of Economic Information.
2. Internal Users of Economic information.
