GAAP vs IFRS and Accounting Basics: A Student Reflection

The Surprising Complexity of Double-Entry Accounting

One thing that caught me off guard in this week's reading was the transactional analysis process, which seems at once like a no-brainer and yet has been laid out with a great deal of apparent complexity. The fact that transactions affect at least two accounts — one with a debit and another with a credit — seems like basic arithmetic. If I give someone a quarter for an apple, my account has been diminished by a quarter and increased by an apple; the apple seller would record the exact opposite transaction: the loss, or debit, of an apple and the gaining, or credit, of twenty-five cents. The fact that huge systems and computer programs have been developed to handle this ultimately simple process is somewhat mind-boggling, and it makes me question when and where things seem to have gotten away from us.

The splitting of all transactions into a variety of accounts does allow for a system with greater control and oversight, but the way the system is set up — and explained — seems incredibly complicated when it is quite simple in practice. The example of paying a utility bill is raised in the reading: while it is true that the expense account is increased while the cash account is decreased, this is the same as saying, "I spent x number of dollars on electricity." The split record-keeping seems to say, "I had utility expenditures in this amount, and losses to my cash supply due to those utility expenditures by the same amount." Personal budgets are not generally divided into many accounts — there is income and expense, with the former needing to cover the latter. While I understand the more complex double-entry accounting system, I do not fully understand why it is so necessary.

GAAP vs. IFRS: The Case for Global Standardization

The differences between GAAP and IFRS appear to be largely in the details, but these details can have drastic effects on the ultimate presentation of financial data and accounting practices. The fact that most of the rest of the world already uses IFRS standards, and that the United States has signaled its intention to move toward IFRS as an option and perhaps as a mandate, makes it clear that the differences are not large enough to cause any major ideological disturbances in America. The transition away from GAAP cannot, therefore, come fast enough. This will of course change the methods by which companies in the United States do their accounting and report financial information, but a change in accounting methods should not lead to a major change in the way these companies actually conduct their business.

If the transition to IFRS is expected to change a company's business practices, that is only a sign that the transition needs to be made that much sooner. If a company makes business decisions based on the way it will be able to report a decision's financial effects — rather than on the real value of that decision — there is clearly something wrong with the accounting methods the company is using. The recent financial crisis, largely caused by questionable accounting practices and tangentially exacerbated by a lack of international standardization, is clear evidence that such practices need to change. With an international standard already available, why not use it?