OVERVIEWBusinesses both in the United States and the rest of the world must adhere to certain regulations in the accounting field. These regulations are part of the standards of accounting. There are two main types of accounting standards. First, the Generally Accepted Accounting Principles used in America. Another type of standard is the International Financial Reporting Standards Accounting Standards (IFRS). As a business, it will be important to know the difference between gaap and ifrs. Knowing the differences will help businesses all over the world know which standards they must follow and which ones apply to them.
All organizations must follow and meet accounting standards in order to comply with the required regulations. The most common way to reveal the financial condition of an entity is to prepare financial reports, balance sheets, income statements and financial disclosures according to the Financial Accounting Foundation. Private businesses, public entities, non profit organizations and government entities must comply with these accounting standards. Whenever organizations are looking to provide financial statements and other information, they will use these standards. The financial reporting allows them to stay compliant with government regulations. Also, it provides valuable information to investors and lenders who are looking to make financial decisions.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The most common type of standards of accounting which businesses must be knowledgeable of is GAAP which stands for generally accepted accounting principles. With GAAP standards, a number of organizations will be in better position to report financial information accurately. Any accountants who work for publicly traded companies will need to follow GAAP accounting standards whenever they prepare financial statements.
There are 12 fundamental accounting principles that are divided into a few significant categories according to The University of Scranton. These categories are: Assumptions, Principles and Constraints. With assumptions, the accountant will be able to determine the actual entity of a particular business. In most cases, the accountant will be able to determine whether the entity is a corporation, a partnership or a sole proprietorship.
The next category of GAAP is principles which regulate the way entities report revenue, expenses and how accounting firms must document the any information. Businesses recognize revenue and try to match corresponding data to help keep revenue reporting more organized. This is essentially reporting the income of a particular business.
Constraints is the third major category of GAAP. Companies receive limited information in order to complete audits and statements. For example businesses should look to claim depreciation for fixed assets. However, if the asset is of little value, accountants can just write it off as an expense. Under constraints, accountants choose the reporting method that has the most significant impact on the financial situation of a business. This will often result in either increasing or decreasing the income and liabilities of a business.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
According to Investopedia, the other type of accounting standards is the IFRS which is the second main form of financial reporting regulations. The IFRS is in all nations outside of the United States. Both public and private entities in the foreign countries adhere to these financial reporting and auditing regulations. IFRS standards are required by multinational companies when looking to engage in financial reporting. Whenever an entity prepares financial statements, the IASB will establish the standards that they must follow. This must occur in order to complete legitimate financial audits and reports for businesses and government organizations.
Similar to GAAP in America, entities that are regulated by the IFRS will be required to report financial information to government entities, investors and lenders. This information will be used to help lenders and investors make decisions on either lending money to a company or investing in it. The IFRS will also allow a business to meet government expectations when it comes to reporting assets, liabilities, profits and losses accurately.