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How to Distinguish Among Different Users of Accounting Information

People who use accounting information fall into two broad groups: insiders and outsiders. Business managers are insiders; they have the authority and responsibility to run a business. Everyone else is an outsider.

Insiders need a good understanding of accounting terms and the methods used to measure profit and put values on assets and liabilities. Accounting information is indispensable for planning and controlling the financial performance and condition of the business. Likewise, administrators of nonprofit and governmental entities need to understand the accounting terminology and measurement methods in their financial statements.

All others are outsiders and not privy to the day-to-day details of a business or organization. Outsiders have to rely on financial reports from the entity to know what’s going on. Therefore, they need to have a good grip on the financial statements included in the financial reports. Financial reports are really the only source of financial information they get directly from a business or other organization.

By the way, the employees of a business — even though they obviously have a stake in the success of the business — do not necessarily receive its financial reports. Only the investors in the business and its lenders are entitled to receive the financial reports.

Of course, a business could provide accounting information to those of its employees who are not shareowners, but generally speaking most businesses do not. The financial reports of public businesses are in the public domain, so their employees can easily secure a copy. However, financial reports are not automatically mailed to all employees of a public business.

In your personal financial life, a little accounting knowledge is a big help for understanding investing in general, how investment performance is measured, and many other important financial topics. With some basic accounting knowledge, you’ll sound much more sophisticated when speaking with your banker or broker.

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