Understanding the Concept of Balance Sheet

Understanding the Concept of Balance Sheet

Introduction

Organizations and business entities uses various kind of financial statements to provide insights about their overall performance. Mainly there are four types of financial statements use by an organization; income statement, balance sheet, cash flow statement and statement of owner's equity. This assignment focuses on describing one of those statements and that is balance sheet. Balance sheet describes the financial health of an organization. It describes what an organization possesses. A typical balance sheet explains the financial health of an organization over a period of time, however in income statement information regarding one year is presented.

Discussion

A. Difference between US GAAP and IFRS

The globalization of accounting standards have made it easier for all the organizations as they now have one medium of comparison for organizations from any part of the world. On the basis of the above information collected from several secondary sources it has been examined that globalization of accounting standards has a positive impact on the overall performance of the organizations. The impact of accounting standards that is IAS/IFRS and GAAP/FASB also led to betterment in the financial reporting of the information essential for the users such as investors, shareholders, creditors and etc.

There are different categories on the basis of which there are differences between the GAAP and IFRS accounting standards that are implemented for providing true and fair view of the financial information recorded during a fiscal year. The following are the basis of differences:

Fundamental basis: In the IFRS accounting standards the principles are more in the form of a principle and based upon the judgement. These principles also contain fewer rules, regulations and guidelines that should be followed in order to present books of accounts and other types of financial information. However, on the contrary while using the GAAP accounting standards there are generally precise guidelines that should be followed by the organizations in order to operate in a true and fair manner (Opperman, 2009).

Inventory Costing Method: While using LIFO inventory costing method it is necessary that a certain accounting standard should be followed. Like companies that are using GAAP for their reporting purpose are allowed to use LIFO inventory costing methods. On the contrary, companies that are using IFRS accounting standards are not allowed to use LIFO inventory costing methods for recording status of inventories during a fiscal year (Flood, J., 2012).

Inventory Valuation: The valuation of inventory under the GAAP principle is done on the basis of lower of cost or market value. On the contrary, while using IFRS the valuation of inventory is done on the basis of lower of cost or net realizable value.

Goodwill: Companies that are using GAAP accounting standards are using two impairment tests through which they are including the value of goodwill. At the same time the goodwill is not amortized under the Generally Accounting Accepted Principles (GAAP). However, the companies that are using IFRS also follow the similar rules and do not impair ...