Reference no: EM131588321
THE ACCOUNTING CYCLE
The accounting cycle is a series of chronological steps that are followed during preparation of financial statements and other books of accounts. These steps are;
1. Identifying and analyzing business transactions. In this step, all business transactions and identified into the journal accounts, i.e. cash account, accounts receivables, etc.
2. The business transactions, once analyzed and classified are posted on the journal. The journal is a general book that is used to record daily business transactions. All recording is done using the double entry system where for every debit transaction there must be a credit transaction.
3. Once posted to the journal, recordings are done on the ledgers. These are the various accounts to which each specified and classified transaction is recorded. For instance, cash transactions are posted to the cash account.
4. A trial balance is then prepared to check whether the accounts are in balance. The trial balance is used to correct mistakes in the previous steps like posting of wrong values or omitted transactions.
5. Adjusting entries are then made to correct and adjust the entries in the various accounts based on the information provided.
6. Another trial balance, this time with the adjusted recordings, is prepared to check whether the adjustments were correctly done. The recordings in the adjusted trial balance are done in the order of elements; assets, liabilities, stock, revenues and finally expenses.
7. If the adjusted trial balance has balanced with no differences between the debit and credit sides, then the financial statements are prepared. These statements include the balance sheet, income statements and statement of stakeholders' equity.
8. Closing entries are then made to close the nominal accounts. Revenues and expenses are cleared using the income summary account.
9. A post-closing trial balance is made featuring the balances of the income summary
CONCEPTUAL FRAMEWORK DIFFERENCES BETWEEN THE ASPE AND THE IFRS
Conceptual framework for accounting is a foundation that ensures existing standards and practices are clear and consistent. The framework also assists in application of standards, provides guidance in responding to issues arising and also increases the user's understanding of financial statements. There are some present differences between the conceptual framework of the IFRS and that of the ASPE. These differences are;
1. ASPE identifies a higher understandability status than the IFRS. Understandability is the accounting principle that recommends financial statements to be prepared in a way that is easily understood by the users of the information.
2. In ASPE, financial statements are considered reliable if they are a faithful representation of the company's summary of operations and financial position. On the other hand, in IFRS, financial statements are considered reliable if they follow all the set guidelines established by the IFRS principles.
3. ASPE has a higher comparability status than the IFRS. Comparability is a principle where similar companies use similar accounting principles. Comparability status is higher in ASPE than in IFRS since the IFRS is used globally by countries in different regions and whose regulations of financial reporting differs.
4. Another difference between the conceptual framework of the ASPE and that of the IFRS is that under ASPE, the conservatism principle is identified as a qualitative characteristic. Conservatism is the choice of account reporting that is least likely to overstate the company's assets, and revenues or understate liabilities and expenses. Under the IFRS the choice to report assets, revenues, liabilities and expenses is at the discretion of each of the companies.
Despite these key differences, the conceptual frameworks of the IFRS and of the ASPE are more similar than they are distinct. This is because, they both seek to lay foundations that enhance the quality of accounting.
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