The
purpose of accounting is to gather financial information and report on the
financial position and performance of a business through a financial statement.
The information is collected through accounting records. With the information,
I company can make decisions on management, investment, and even lending or
borrowing money (Bragg, 2017). In other words, accounting communicates on the
organization’s financial position to its managers, investors, the government,
and banks.
Different
countries have different accounting standards because of their difference in
culture, languages and economic and social traditions. As a result, they
develop differences in accounting practices ("International Accounting
Standards," n.d.). According to Nobes (1992), harmonization is the process
of setting bounds for the variation degree which is aimed at increasing
compatibility of accounting practices. Harmonization can also be understood as
the process of converging accounting standards to a single set to be used
across the globe rather than having different accounting standards for
different countries. Harmonization, therefore, is aimed at reducing difference
that occurs in the financial reporting process in the world.
Harmonization
of accounting standards is vital in several ways. One of this is achieving
comparability in financial statements. As financial report preparation and
presentation standards are different for each country, it is complicated for
investors to compare them. It becomes even more difficult for multinational
companies. However, with harmonization the level of comparability increases
allowing companies to prepare and present their financial statements following
one set of rules (Dudovskiy, 2013).
Another
importance of harmonization is that it allows increased auditing efficiency.
The efficiency is achieved where companies have to use one set of reporting
standards which serves to save the company’s money and also reduce trade
barriers which ultimately allows increased access to international capital markets
(Dudovskiy, 2013).
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References
Bragg, S. (2017). The purpose of
accounting. AccountingTools. Retrieved 25 February 2018, from https://www.accountingtools.com/articles/what-is-the-purpose-of-accounting.html
Dudovskiy, J. (2013). Need for
Harmonisation as a Reason for International Differences in Financial Reporting.
Research Methodology. Retrieved 25 February 2018, from https://research-methodology.net/need-for-harmonisation-as-a-reason-for-international-differences-in-financial-reporting/
International Accounting Standards.
Saylordotorg.github.io. Retrieved 25 February 2018, from
https://saylordotorg.github.io/text_international-business/s19-01-international-accounting-stand.html
Nobes, C. (1992). A Political-history
of Goodwill in the UK- An Illustration of Cyclical Standard Setting, Abacus,
28(2), 142-167.
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