Sep 20, 2021
Accounting as such has no national boundaries. Globalization strengthens positions and economics of different countries and, as a result, they integrate and interact with each other. This fact has led to the necessity to have comparable economic data regardless of the geographic position. Accountants learn and exchange accounting techniques from different countries trying to juxtapose information and facilitate the process of decision-making based on this information. In this regard, classification of the accounting system becomes extremely important as it allows comparing and contrasting accounting data in the globalized world.
The importance of classification has its origins in the sphere of globalization as trade and economic relations erase borders of the countries. Many trade transactions and financial operations have moved beyond the borders of national economies to the international arena. In these circumstances, accounting reporting becomes the most important source of information as it provides understanding of correctness or incorrectness of economic decisions based on comparable information. For example, to make a decision regarding merging or acquisition in different countries, both sides must compare tangible and intangible assets, profitability ratios, volumes and cost of inventories, net profit for the period, etc. If their data is comparable, it will increase the transparency of the transaction, facilitate decision-making, and reduce risks. Thus, classification of accounting practices provides understanding of comparability of economic data and helps users with it.
Classification is useful for financial statement users in three different ways. First, it helps understand differences and similarities of systems of different regions. For example, a financial statement user can understand to what extent the net profit of two companies located in different countries is comparable. This fact, in turn, can assess accounting procedures in different countries with an aim to reduce the impact of such differences in economic relations and to make the data comparable. In other words, the user can make it comparable by recalculating data. Moreover, classification patterns allow estimating possible integration of all accounting systems, their further influence, and macroeconomic international merger. It means that the financial user can know, learn, and use common international accounting theory according to which he/ she compares data and eliminates differences.
The example of the USA (Anglo-American group) and France (Latin group) demonstrates the exposure of data from different countries. The US financial reporting in contrast to the Latin practices is built to give creditors and investors as much benefit as possible in making economic decisions. The main principle that dominates in this accounting model is the principle of reliability, which is superior to the other principles. It fundamentally distinguishes the Anglo-American accounting system from the Latin. Inventory accounting includes use LIFO and FIFO in most cases, which is similar to the French system. Financial statements include a balance sheet, a statement of financial results, or a profit and loss statement, a statement of accumulated retained earnings, a statement of changes in financial position, or a statement of use and sources of funds, a statement of changes in equity, an explanatory note, and an audit firm opinion. The main reports are a profit and loss account, a balance sheet, and a cash flow statement.
The profit and loss accounts reflect changes in the net balance of assets (equity of the company's owners) resulting from the company's business transactions. The balance of retained earnings at the end of the period is an integral part of the owners' equity. The balance sheet is based on the basic accounting equation. The statement of cash flows reflects the turnover of money or its equivalents. The balance sheet reflects the state of the company's finances at a specific point in time – the end of the reporting period.
The French accounting system in contrast to the American one is characterized by the so-called central way in the data display in accounting and in the use of accounting principles. Comparing with the USA, the legal norms are more important as the French accounting system gives them absolute primacy. Distinction between the systems includes the exclusion of tax impact from accounting. Similarly to the US firms, French companies can evaluate reserves via different methods. Analogies between two systems include a balance sheet, which contains information about the company's financial position necessary to assess the economic resources, financial structure of the company, its liquidity, etc. However, one of the specific features of accounting regulation in France is the system of national accounts that contains a unified chart of accounts, standard forms of accounting, instructions, and recommendations for its compilation. It plays an important role in composing a balance sheet in contrast to the USA.
Financial reporting shows balances on accounts and their changes as well as aggregated indicators for several accounts, such as net profit. Balance sheets allow assess the company's ability to adapt to changes in the country’s economic processes. However, another difference between the balances of the French companies is that they become functional in the asset and legal in the passive. In France, it is not customary to group expenses according to their functional purpose. The main feature of the French accounting system is its legal essence since all provisions come directly from commercial and tax legislation.
In conclusion, the classification of accounting systems helps many users to compare economic data on the global market. Classification provides understanding in the scale of differences and insights how to integrate accounting information. Besides, it creates a common international accounting theory. It greatly facilitates use, decision-making, and comparison, which was made on the basis of French and the US examples. Thus, classification of the accounting system becomes extremely important as it allows juxtapose accounting data in the globalized world.
This material was provided by Stacy Collins who works at https://specialessays.com/business-essay/