Understanding Accounting Information Users and Plant Asset Depreciation
Accounting Information and its Users
Accounting information helps users make better financial decisions. Users of financial information may be both internal and external to the organization.
Internal Users (Primary Users)
Internal users of accounting information include:
- Management: For analyzing the organization’s performance and position and taking appropriate measures to improve the company’s results.
- Employees: For assessing the company’s profitability and its consequence on their future remuneration and job security.
- Owners: For analyzing the viability and profitability of their investment and determining any future course of action.
Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts, and financial statements.
External Users (Secondary Users)
External users of accounting information include:
- Creditors: For determining the creditworthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers’ financial health. Creditors include suppliers as well as lenders of finance such as banks.
- Tax Authorities: For determining the credibility of the tax returns filed on behalf of the company.
- Investors: For analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company.
- Customers: For assessing the financial position of its suppliers, which is necessary for them to maintain a stable source of supply in the long term.
- Regulatory Authorities: For ensuring that the company’s disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.
Cost Principle Application to Plant Assets
Plant assets are resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers.
It is important for companies to (1) keep assets in good operating condition, (2) replace worn-out or outdated assets, and (3) expand their productive assets as needed.
Concept of Depreciation
Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.
- Such cost allocation is designed to properly match expenses with revenues.
- Depreciation affects the balance sheet through accumulated depreciation, which is reported as a deduction from plant assets.
- It affects the income statement through depreciation expense.
- Depreciation is a process of cost allocation, not a process of asset valuation.
- The book value—cost less accumulated depreciation—of a plant asset may differ significantly from its market value.