Silay Institute, Incorporated

Fundamentals of Accounting 1

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TOPIC: Users of Accounting Information and
Types of Business According to Activities

▰ Users and Their Information Needs

▰ Fundamental Business Model
▰ Types of Business

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 OBJECTIVES

▰ Define external and internal users.

▰ Describe the information needed by each user.

▰ Describe the fundamental business model.

▰ Differentiate the types of business according to activities

Silay Institute, Incorporated

 Content: USERS AND THEIR INFORMATION
NEEDS

Decision-makers need information. The more important the decision

is, the greater is the need for reliable information. Virtually all
businesses and most individuals keep accounting records to aid them
in making decisions. Users of accounting information can be grouped
into either external or internal users.

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 External users

- are individuals and others that have current or potential financial interest
in the reporting entity but are not involved in the daily operations of the
entity. The information needs of these users are diverse so that only the
primary or the general purpose financial statements are provided. These
users may include owners, stockholders, creditors, customers, suppliers,
government agencies, potential investors, brokers, trade associations and
the public. Their information needs are served by financial accounting.

Silay Institute, Incorporated

 Internal users

- include the board of directors, chief executive officers, chief

financial officers, vice presidents, internal auditors, business unit
managers, plant managers and the supervisors. These employees have
different specific goals that are designed to help the entity attain its
overall strategies and mission. Management accountants design and use
an information system that primarily helps in planning and control
decisions. Silay Institute, Incorporated
 The users of accounting information and their
information needs follow:

▰ Employees are interested in information about the stability and

profitability of their employers. They are also interested in information
which enables them to assess the ability of the enterprise to provide
remuneration, retirement benefits and employment opportunities.
▰ Stockholders or Investors need information to help them determine
whether they should buy, hold or sell.
▰ Creditors or Lenders are interested in information that enables them to
determine whether their loans and the related interest will be paid when
due.
Examples: banks, cooperatives, finance companies
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Customers have an interest in information about the continuance of an
enterprise, especially when they have a long-term involvement with or are
dependent on, the enterprise.
Suppliers and other trade creditors are interested in information that enables
them to determine whether amounts owing to them will be paid when due.
Government and their agencies are interested in the allocation of resources
and, therefore, the activities of the enterprises. They also require information in
order to regulate the activities of the enterprises, determine taxation policies
and as the basis for national income and similar statistics.
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Public. Enterprises affect members of the public in a variety of ways. For
example, enterprises may make a substantial contribution to the local
economy in many ways including the number of people they employ and their
patronage of local suppliers. Financial statements may assist the public by
providing information about the trends and recent developments in the
prosperity of the enterprise and the range of its activities.

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BUSINESS ENTITY

Customers Who Buy

Products and Services
Employees Who Are Sold by the Business Government Agencies
Paid Wages and Salaries That Regulate and
and Provided Other Collect Taxes from the
Benefits Business

BUSINESS ENTITY

Suppliers/Vendors Individual and Financial

of Materials, Services, Institutions
Supplies, Parts, Tools Banks and Other Who Invest Money
Equipment and Machines Financial Institutions in the Business as Owners, Not
Bought by the Business Who Lend Money to Creditors, the Business Has
the Business on Which to Earn Profit on Their Capital
Interest is Paid Invested in the Venture
(Source of Debt Capital) (Sources of Equity Capital) 11
 Fundamental Business Model

For a business to be successful, it needs to develop a product or service that

customers will pay for and thus create a revenue stream. It can be a new
product or service that meets specific needs. It can also be a better product or
service. Or, it can a product or service that offers a better value proposition. a
business requires investments to enable it to pay for the infrastructure,
equipment and personnel. Only after a skillful combination of these elements
can a business generate a revenue stream.
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Below is an Illustration how a business is structured to
provide a customer proposition. The business model is built
on five activities:

Capital Sales

1 4 4
Business Owner Cash Operating Asset Products or
Assets Use Services
Banks 3
2
5

Return 13
2 Cost
Fundamental Business Model

The model illustrates the way money flows around a business and
provides the basis of accounting. To manage a business effectively it is
important to know how the cash has been spent and how profitable the
products or services have been to the business. The availability of this
historic information helps management to make judgments on how to
improve the performance of business.
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 Types of Business

Although the fundamental business model does not vary, there are
infinite ways of applying it to provide the range of products and
services that make up the business world. However, the range of
products and services can be summarized in seven broad
categories, they are as follows:

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 Types of Business

Type Activity Structure Examples

Services Selling people’s Hiring skilled staff and selling their Software
time time development
Accounting
Legal
Trader Buying and Buying a range of raw materials and Wholesaler
selling products manufactured goods and
consolidating them, making them Retailer
available for sale in locations near to
their customers or online for
delivery
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 Types of Business

Type Activity Structure Examples

Manufacture Designing Taking raw Vehicle Assembly
products, materials and Construction
aggregating using equipment Engineering
components and and staff to Electricity, Water
assembling convert them into Food and drink
finished products finished goods Chemicals
Media
Pharmaceuticals

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 Types of Business

Type Activity Structure Examples

Raw Materials Growing or Buying blocks of Farming

extracting raw land and using them Mining
materials to provide raw Oil
materials
Infrastructure Selling the Buying and operating Transport (airport
utilization of assets (typically large operator, airlines, trains,
infrastructure assets); selling ferries, buses)
occupancy often in Hotels
combination with Telecoms
services Sports facilities
Property management
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 Types of Business

Type Activity Structure Examples

Financial Receiving deposits, Accepting cash from
lending and depositors and paying Bank
investing money them interest; using the
money to provide Investment House
loans to borrowers,
charging them fees and
a higher rate of interest
than the depositors
receive

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 Types of Business

Type Activity Structure Examples

Insurance Pooling premiums of Collecting cash from Insurance
many to meet claims many customers;
of a few investing the money
to pay the losses
experienced by a few
customers. By
understanding the risk
accepted and the
likelihood of a claim,
more premium
income can be earned
than claims paid

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THANK YOU!

Silay Institute, Incorporated