Which of the following statements is true regarding the recording process?
- a. Because IFRS (International Financial Reporting Standards) rely more on fair value and less on historical cost than U.S. GAAP, the double-entry accounting system is not widely used by companies who use IFRS.
- b. Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process.
- c. A trial balance using IFRS (International Financial Reporting Standards) is organized by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order.
- d. All of the choices are correct regarding the recording process.
The correct answer and explanation is :
The correct answer is b. Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process.
Explanation:
Both IFRS and U.S. GAAP are accounting frameworks used to prepare financial statements, and while they have some key differences in specific rules and treatments, the fundamental process of recording transactions and the basic accounting system used is very similar in both frameworks. Here’s a breakdown of why the other options are incorrect and why option b is correct:
- Option a: “Because IFRS relies more on fair value and less on historical cost than U.S. GAAP, the double-entry accounting system is not widely used by companies who use IFRS.”
- This statement is incorrect. Both IFRS and U.S. GAAP use the double-entry accounting system, which requires that every transaction involves at least two accounts (one debit and one credit). While IFRS does emphasize fair value more than U.S. GAAP, the double-entry system is still widely used under both sets of standards. Therefore, the double-entry accounting system is not tied to a specific valuation method like fair value or historical cost.
- Option c: “A trial balance using IFRS is organized by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order.”
- This is not correct. Both IFRS and U.S. GAAP typically follow a similar order when organizing accounts in a trial balance: balance sheet accounts (assets, liabilities, equity) are listed first, followed by income statement accounts (revenues, expenses). There is no significant difference in how trial balances are generally organized between IFRS and U.S. GAAP in this regard.
- Option d: “All of the choices are correct regarding the recording process.”
- Since options a and c are incorrect, this option is also incorrect.
Why option b is correct:
Both IFRS and U.S. GAAP follow the same fundamental principles of accounting. These include:
- Debits and credits: Both systems use the same structure for recording transactions (debits on the left side and credits on the right side).
- Double-entry accounting: Each transaction is recorded with at least one debit and one credit, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.
- Recording process: The steps for recording transactions—such as journalizing, posting to the ledger, and preparing a trial balance—are fundamentally the same under both IFRS and U.S. GAAP.
Despite differences in specific accounting treatments, such as fair value vs. historical cost and specific revenue recognition criteria, the core accounting principles and the recording process itself are consistent between the two frameworks.