Every company in the world has to document their accounts in some shape or form. They do this to keep track of their spending and to see how much money they have coming in.
There are also legal reasons for doing so. Businesses need to pay their taxes and may even have to show their accounts to the government in order to demonstrate they aren’t breaking any rules.
Of course, taxmen don’t have time to deal with thousands of different record-keeping methods. So lawmakers and financial regulators have introduced guidelines that dictate how a company should prepare their accounting records. These are called ‘accounting standards.’
Today, most companies across the world publish their financial results according to a set of accounting standards known as the International Financial Reporting Standards. This is often abbreviated to IFRS.
IFRS are used in 140 jurisdictions around the world and are designed to make financial results more easily comprehensible to people from other countries.
Accounting standards and investing
Accounting standards aren’t just useful for tax authorities. They also help investors that want to understand how a company is performing.
The breakdown of a company’s income and spending can give investors some insights into how a business is performing and what it has been doing over a specific period of time.
In conjunction with other bits of information, accounts can be used to guide an investor’s decision-making process.
Having a set of account standards makes this process much easier. If all accounts are presented in the same way, it allows investors to understand a company’s accounts much faster than they would if each business had its own way of presenting its finances.