Ethical Dimensions of Financial Accounting: Keeping two sets of Records Financial Accounting is an informational tool intended for both managers of a company and for external parties of an organization as defined by Garrison. There is also an existence of some regulatory bodies requiring the use of different principles accordingly within companies’ jurisdiction. In some cases, companies are required to keep two sets of accounting records. For example, publicly traded companies are required to use GAAP by the U. S. Securities and Exchange Commission.
But GAAP and IFRS depreciation rules don’t always match up. Companies routinely account for earnings and expenses differently on their annual reports, compared with their tax returns . A contributing factor to keeping separate records is the different treatment in measuring income. The two approaches used in measuring income is the accrual-based and cash based accounting. As defined in our textbook Managerial Accounting by Garrison, Accrual accounting measures income as the difference between revenues recognized in the period versus and the expenses that are matched with those revenues.
In contrast, cash basis accounting measures sales unless cash is actually received similarly with costs; they are deducted from sales in the same period they are paid for cash disbursements. Varying approach to accounting for depreciation is also permiited such as charging expense over a short period of time compared to its useful life of certain assets. (straight line method versus the accelerated depreciation). This lets the fixed assets expense higher at the early years of its acquisiton, thereby reducing taxable income.
This approach to depreciation poses a benefit to a company to actually invest in fixed assets which may lead to operating efficiences. Another perspective is that businesss usually does a separate keeping of record for tax accounting purpose in order to minimize the possible amount of taxable income. In reality, companies tend to overstate income when the financial information is being presented to external creditors or investors, whereas understating it to government regulators.
This is practically done by businesses to stay in business—which is logical and legal. The most important thing to be adhered is to report financials set within accordance to the tax regulations, otherwise a company will be subject to loss of credibilty and trustworthiness to stakeholders and other external parties. References: Is It Legal for a Business to Maintain Two Sets of Accounting Records? | eHow. com http://www. ehow. com/info_7840065_legal-two-sets-accounting-records. html#ixzz29M1e7rFq
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