A reporting entity is a business with an obligation to prepare external financial reports for the benefit of parties with an interest in its operations, such as suppliers and investors. The term “accounting entity” can be used in a similar way. Among accountants, including those involved in setting standards and practices, there is some debate about the precise definition of a reporting entity. The latest opinions of the industry are available from professional accounting organizations.
Reporting entities have what are known as “dependent users,” or individuals, companies, and organizations who need access to financial information but may not be able to obtain it directly. Investors are an excellent example; they need information about how well a company is performing so they can make investment decision, but they don't have access to the company's internal accounting records. These entities are also distinct from their owners and employees. A chain of grocery stores, for example, has finances separate from those of the owners and workers.
Sometimes a reporting entity is very easy to identify. A publicly traded company meets the basic standards, for example. Investors need access to financial information, suppliers need to know how well the company is doing to decide whether to offer credit, and other companies need recent information to negotiate deals with the company. With a privately held company, some of these criteria may still be met; for example, suppliers who offer letters of credit need to know that the company is not a big risk.
Smaller companies are more nebulous. It may be difficult for a small business owner to separate business and personal assets, especially since some may use personal assets like a residence to secure loans and other sources of funding. This blends the business and the owner, and would make it appear to be something other than a reporting entity. There may still be parties with an interest in its economic health and performance, however.
When a business is classified as a reporting entity, it needs to prepare external and public reports on its financial health. These must meet standards and be consistent in nature so individuals reviewing them know the information is useful for multi-year comparisons. The reports need to be available on request to parties with an interest, and the company may also need to send them out to specific groups, like shareholders, who are entitled to an annual report on the company for their use in making investment decisions.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.