International Business

The purpose of accounting is to gather financial ...

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).

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.