FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

USERS OF
ACCOUNTING

MODULE 1.3
Learning Objective:
After completing this module, the learners
are expected to:
Define external and internal users and
gives examples
Identify the type of decisions made by
each group of users
Describe the type of information
needed by each group of users
 Users of
Accounting Information
 Internal Users - Internal users are
those who make decisions on behalf
of the organization.

 External users - The external users of

financial reports are those who make
their decisions based on the
company’s financial information.
USERS OF ACCOUNTING INFORMATION

INTERNAL USERS EXTERNAL USERS

Owners Investor
Managers Creditors
Employees Customers
Suppliers
Tax Authorities
Government
General Public
INTERNAL USERS

• Owners - they provide the capital to the

business. Owners need these accounting
information to help them decide whether
they should withdraw or increase their
investments. They are interested to know
the returns on their investment.
INTERNAL USERS

• Managers – They need financial

information because they need plans and
organization firm.
• Employees - they assess the company’s
profitability and stability, and their
consequence on future salary and job
security.
EXTERNAL USERS

Investor
Creditors
Customers
Suppliers
Tax Authorities
Government
General Public
EXTERNAL USERS
• Potential Investor -they need information to
help them decide whether they should invest
in the business.
“Should I invest in this company or Not?”

• Creditors - they assess the credit worthiness

and the capability of the business to pay its
obligation including the related interest on
maturity date.
“Can they pay their obligation when they fall
due?”
EXTERNAL USERS
• Customers - they assess the financial position of their
suppliers which is necessary for them to maintain a
stable source of supply in the long term. They are
interested to know whether the business will continue
to honor its product warranties.

• Suppliers - they use the financial statements of their

customers to determine whether the debts owed to
them will be paid when due or whether the customer
has enough funds or resources to pay the goods to be
delivered or the services to be rendered.
“Can they pay for the goods and service I provided?”
EXTERNAL USERS
• Tax Authorities - they use financial reports to
determine the credibility of the tax returns filed on
behalf of the company. They are interested to know if
the business paid correct amount of tax.
“Are they compliant?;
Do they pay the right amount of taxes?”

• Government -they want to ensure that the company’s

disclosure of accounting information is in accordance
with the rules and regulations.
“Do they follow the rules and regulations?”
EXTERNAL USERS

• General Public/Public - they use the financial

information to know how the business affects
the economy, possible prospects for
employment, and/or for educational and
research purposes.
“What are the new public trends?”
 Direct users
vs.
Indirect users
Direct users are those with direct
interest over the company. They
use financial information to protect
their own stake in the entity. They
include owners, management
(directors and officers), employees,
tax authorities, suppliers,
creditors, and customers.
Indirect users are those who represent
the direct users.
They use financial information to
provide advice to and protect the
interest of direct users. They include
regulatory agencies or registration
authorities, financial analysts and
advisors, stock exchange, lawyers,
reporting agencies, trade associations,
and labor unions.
Evaluation:
Classify each of the following as either external
user or internal user.

Write E for external and I for Internal

1.Academe 6. Government
2.Creditors 7. Management
3.Customers 8. Owners
4.Employees 9. Investors
5.General Public 10. BIR
Correct Answer
1. E
2. E
3. E
4. I
5. E
6. E
7. I
8. I
9. E
10.E
 FORMS OF
BUSINESS
ORGANIZATION
MODULE 2.1
Learning Objective:
After completing this module, the
learners are expected to:
• Differentiate the forms of business
organizations.
• Identify the advantages and
disadvantages of each form.
Sole Proprietorship Partnership

Corporation Cooperatives
Sole Proprietorship A sole proprietorship is a
business that is owned by
only one individual for the
practice of trade or
profession or other purpose.
It is the simplest and least
costly form of ownership
among other forms of
business.
Sole Proprietorship However, a business under sole
proprietorship is quite risky
since the owner assumes
unlimited liability and in most
cases even his or her personal
assets are on the line if the
business cannot pay the
creditors. This form of business
is common to small business
entities like grocery store, repair
shop, and beauty parlor.
Sole Proprietorship

Advantages Disadvantages

 Full control of operations  Unlimited liability – the owner is legally obliged

 Easy to start, easy to
dissolve
 All profits go directly to the
owner
 Less regulations
to pay all business
 Limited life – the business ceases to operate if
the owner dies, becomes physically or mentally
incapacitated, or is imprisoned
 Difficulty in raising capital

 The government taxes the

owner and not the business
 A partnership is a business that is
owned by two or more individuals
pooling their resources together as
common fund. The partners are
normally involved in the
management and operation of the
business. The profit of the business
is divided among the partners as per
Partnership partners’ agreement.
Partnership
Advantages
 Increased potentials from two
or more different strengths
 Easy to form with proper
agreements on its formation
 Less regulations compared to
corporations
Disadvantages
 Unlimited liability of one or all owners
 Limited life-the business ceases to operate if
one of the partners dies, becomes physically or
mentally incapacitated, or is imprisoned
 High possibility of dispute and conflicts between
partners
Corporation
A corporation is an
artificial being created by
operation of law, having
the right of succession and
the powers, attributes, and
properties expressly
authorized by law or
incidental to its existence
Corporation

Advantages Disadvantages

 More sources of funds  More regulations to be followed

 Easy to transfer ownership  Profit is taxed at the corporate tax rate
 Liability of owners is limited  Costly to incorporate

 Unlimited commercial life  Shareholders are taxed again when profits

are distributed to them
Cooperatives

A cooperative is a business that is

owned by a group of individuals
who also serve as benefactors to
the business endeavor. A
cooperative usually requires at
least fifteen members to function.
Cooperatives
Advantages
 Unlimited life. The change of
members does not dissolve the
business.
 Democratic organization. Social
equality of members is the most
important component of
cooperatives. It ensures that it
serves its members’ needs.
Disadvantages
 Difficulty in obtaining capital through
investors. Cooperative has a “one-member-
one-vote” philosophy. Big investors may
choose to invest their money to other firms
where their voting power is equal to their
ownership interest.
 Lack of membership and participation. The
cooperative may not fully function if members
do not involve themselves in the routine
business operation.
Sole Proprietorship Partnership

Corporation Cooperatives