Who uses accounts, what makes them useful, and why we keep them
- Name internal and external users and say what each one wants to know
- Explain the four qualitative characteristics: reliability, relevance, understandability, comparability
- State the four objectives of accounting and calculate profit or loss from revenue and expenses
- Describe the roles of accounting and its limitations
Last time we said accounting is a language. But a language is useless without listeners! Today we meet the people who "listen" to accounts: the owner, the manager, the bank, the tax officer, even the customer. Then we ask a sharp question: what makes accounting information good? Finally we list the objectives of accounting and its role in the modern world. These points come again and again as 1-mark, 3-mark and 4-mark theory questions, so read them slowly and try to give your own example for each.
1. Users of accounting information
Priya runs Priya Mobile World in Aligarh as a private limited company. In April 2026 she applies for a ₹10,00,000 loan from her bank to open a second outlet. The bank manager asks for the last three years' financial statements. The next week, her main supplier of phones asks, "Can we give you ₹5,00,000 of stock on 60 days' credit?" and quietly checks how quickly she paid in the past. Her store manager, meanwhile, wants a weekly report of which models sell fastest. The GST officer needs her sales figures to check the tax she paid. Same business, same books, but each person wants a different answer from them.
Users of accounting information fall into two broad groups:
| Internal users | External users |
|---|---|
| People inside the organisation who run and manage it | People and bodies outside the organisation who have an interest in it |
| Chief Executive, Financial Officer, Vice President, business unit managers, plant managers, store managers, line supervisors | Present and potential investors (shareholders); creditors (banks, financial institutions, debenture-holders, other lenders); suppliers; tax authorities; regulatory agencies (Registrar of Companies, SEBI, RBI, stock exchanges); labour unions; trade associations; customers; social groups; competitors |
| Can get any report they need, any time, in any detail | Have limited authority and resources to get information, so they depend mainly on published financial statements (Profit and Loss Account and Balance Sheet) |
Shareholders own a company, yet NCERT lists them as external users. Why? Because they do not run the company day to day and cannot walk into the office and ask for any report. They see only the published statements. Do not mark "shareholders" as internal users in the exam.
1.1 Why do users want accounting information?
- Owners / shareholders: Am I getting a satisfactory return on my money? Is the business financially healthy?
- Directors / managers: How are we performing compared with last year and with other firms in the industry? What are our strengths and weaknesses? Is the money invested earning enough, and can we pay our debts on time (stay solvent)?
- Creditors / lenders: Will we get paid? They look closely at liquidity, which means the ability to pay debts as they fall due.
- Prospective investors: Should I invest my money in this business or not?
- Government and regulators (Registrar of Companies, customs department, IRDA, RBI, SEBI, tax departments): to collect taxes such as income tax, customs duty and GST, to protect investors and lenders, and to check that the business follows the law, for example the Companies Act, 2013.
1.2 What exactly does each external user want to know?
| External user | Main interest |
|---|---|
| Investors and potential investors | Risk and return on investment; profitability and share performance |
| Unions and employee groups | Stability and profitability; how wealth is shared (scope for pay rise and bonus) |
| Lenders and financial institutions | Creditworthiness; ability to repay loans and pay interest |
| Suppliers and creditors | Whether amounts owed will be paid when due; whether the business will continue |
| Customers | Whether the business will continue, so that supply of products, spare parts and after-sales service continues |
| Government and other regulators | Tax liabilities, allocation of resources, compliance with rules |
| Social responsibility groups (e.g. environmental groups) | Impact on the environment and its protection; ethical activities |
| Competitors | Relative strengths and weaknesses, for comparison and benchmarking (a strategic interest) |
- (a) Taxes owed → government and tax authorities.
- (b) Pay awards and bonus → employees and labour unions.
- (c) Environmental and ethical behaviour → social responsibility groups.
- (d) Repayment of a long loan with interest → lenders and financial institutions.
- (e) Continued after-sales service → customers.
Look at this list of people interested in the accounts of Gupta Stationery Pvt. Ltd.: (1) the store manager, (2) the bank that gave a loan, (3) the GST department, (4) a paper supplier who gives goods on credit, (5) the plant manager of its notebook unit, (6) the Chief Financial Officer, (7) a school that buys notebooks every year, (8) the workers' union. How many of them are external users?
2. Qualitative characteristics of accounting information
Imagine a weather app that shows yesterday's weather, uses its own strange units and changes its format every day. You would delete it! Accounting information faces the same test. Qualitative characteristics are the qualities that make accounting information understandable and useful for decisions. There are four:
Remember R-R-U-C: Reliability, Relevance, Understandability, Comparability. Think: "Ram Rahim Use Calculators."
2.1 Reliability
Reliability means users must be able to depend on the information. Reliable information is free from error and bias and faithfully represents what it is meant to represent.
To be reliable, information must be:
- Verifiable: independent persons using the same method of measurement would reach the same result. (A bill, a bank statement or a UPI record can be checked.)
- Faithful: it shows what really happened. If stock worth ₹40,000 is lying in the godown, the books should not show ₹60,000.
- Neutral: not tilted to please anyone, for example not showing extra profit just to get a bigger loan.
2.2 Relevance
Relevance means the information is available in time and actually influences the decision of users, by helping them predict outcomes of past, present or future events and/or by confirming or correcting their past evaluations.
- Timeliness: information that arrives after the decision is taken is useless. A bank deciding a loan today needs this year's figures, not those of 2019.
- Predictive value: it helps forecast, e.g. last three Diwali seasons' sales help plan stock for Diwali 2026.
- Feedback value: it confirms or corrects earlier expectations, e.g. "We expected ₹2,00,000 sales in April and actually got ₹2,30,000."
2.3 Understandability
Understandability means decision-makers must interpret accounting information in the same sense in which it was prepared and sent to them.
A message is well communicated only when the receiver understands it the way the sender meant it. So accountants should present information clearly, in the most intelligible way, without giving up relevance and reliability. Clear headings, proper grouping and simple notes help.
2.4 Comparability
Comparability means users should be able to compare the information of an entity over different periods and with other entities. For this, reports must belong to a common period and use a common unit of measurement and a common format of reporting.
- Inter-period (over time): this year's profit of Mehta Mobile Store vs last year's.
- Inter-firm (with others): Mehta Mobile Store's profit margin vs another mobile store in the same city.
| Characteristic | Key question | Broken when… |
|---|---|---|
| Reliability | Can I trust it? | Stock is shown at an inflated value to impress the bank |
| Relevance | Does it help my decision now? | Accounts for 2025-26 are given to the bank only in 2028 |
| Understandability | Can I read it the way it was meant? | Accounts are presented in a confusing, jumbled manner |
| Comparability | Can I compare it with last year or other firms? | The firm changes its reporting format and period every year |
A company prepared its 2025-26 accounts for 15 months (January 2025 to March 2026) in a new format, while its 2024 accounts were for 12 months in the old format. Investors complain they cannot tell whether the company did better or worse. Which qualitative characteristic is violated? (one word)
These four qualities support each other. Information that is reliable but late is not relevant; information that is relevant but full of errors is not reliable. Good accounting tries to achieve all four together.
3. Objectives of accounting
The basic objective of accounting, as an information system, is to give useful information to internal and external users. External users get it mainly as financial statements (Profit and Loss Account and Balance Sheet); management also gets extra reports from time to time. The primary objectives are four:
3.1 Maintenance of records of business transactions
Even the most brilliant manager cannot accurately remember hundreds of purchases, sales, receipts and payments. So a complete, systematic record of every financial transaction is kept regularly. Recorded information can also be verified and works as evidence (for tax, in disputes, for audit).
3.2 Calculation of profit and loss
Owners want to know the net result of their work periodically: profit or loss? Using the records of revenues (incomes) and expenses, a Profit and Loss Account is prepared for the period.
Profit = Revenue − Expenses (when revenue is more)
Loss = Expenses − Revenue (when expenses are more)
- Total revenue = 7,20,000 + 30,000 = ₹7,50,000.
- Total expenses = 5,10,000 + 96,000 + 60,000 + 24,000 = ₹6,90,000.
- Revenue is more than expenses, so there is a profit: 7,50,000 − 6,90,000 = ₹60,000.
In its first year, Verma Electronics earned revenue of ₹4,85,000. Its total expenses were ₹5,12,000. Find the amount of profit or loss (enter the amount only).
3.3 Depiction of financial position
Accounting shows the financial position at the end of each period: what the business owns (assets) and the claims against those resources (liabilities and owner's capital). This statement is called the Balance Sheet (position statement).
3.4 Providing accounting information to its users
The information produced is communicated as reports, statements, graphs and charts to users who need it in different decision situations: internal users (mainly management, for planning, controlling and decisions on cost, pricing and profitability) and external users (who depend on published statements).
Four objectives: R-P-F-I: Records, Profit/loss, Financial position, Information to users. "Ramu Plays Football Indoors."
4. Role of accounting
The role of accounting has kept changing with economic growth and society's demands. It takes a mass of data, measures, classifies and summarises it, and turns it into reports that show the financial condition and results of an enterprise. It plays these roles:
| Role | Meaning in simple words |
|---|---|
| As a language | The language of business, used to communicate information about enterprises |
| As a historical record | A date-wise (chronological) record of financial transactions at the actual amounts involved |
| As current economic reality | A means of finding the true income of an entity, i.e. the change in its wealth over time |
| As an information system | A process that links an information source (the accountant) to receivers (users) through a channel of communication |
| As a commodity (service) | Specialised information is a service in demand in society, and accountants are willing and able to provide it |
Limitations to remember: accounting information mostly relates to past transactions and is quantitative and financial. It does not show qualitative, non-financial facts such as staff morale, customer loyalty or the skill of the manager. Keep this in mind while using it. A 3-mark answer on "role of accounting" is stronger if you add this line at the end.
Accounting is not an end in itself; it is a means to an end. The end is better decisions by users.
- Comparability
- Understandability
- Relevance
- Reliability
- A bank that has given a loan
- A shareholder
- The Registrar of Companies
- The plant manager of the company
📌 Points to remember (Quick Revision)
- Internal users (executives, managers, supervisors) manage the business; external users (investors, lenders, suppliers, government, unions, customers, competitors) depend on published statements.
- Each user wants something different: lenders want repayment ability, suppliers want timely payment, employees want stability and bonus, customers want continuity.
- Four qualitative characteristics: Reliability (verifiable, faithful, neutral), Relevance (timely, predictive, feedback), Understandability, Comparability (common period, unit, format).
- Objectives: maintain records, calculate profit or loss (Revenue − Expenses), depict financial position, give information to users.
- Roles: language of business, historical record, current economic reality, information system, a service; limitation: past, financial and quantitative only.
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