Top 6 Reasons Accounting Diversity Can Affect Your Business Opportunities

Tally Solutions | Updated on: September 22, 2023

What is Accounting Diversity?
How can TallyPrime help?

Expansion and growth opportunities for your business have no limit! Your business may have a golden chance to penetrate a new geographic market or can boost profits by attracting international investments to provide funds for your upcoming plans and new products.

However, one big obstacle that can interrupt these opportunities is related to accounting principles and is known financially as (Accounting diversity). This diversity can adversely impact your business by failing to attract international funds based on accounting differences. A profitable business can appear to be a losing venture when the company's books are recalculated into figures using diverse accounting solutions.

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What is Accounting Diversity?

Accounting Diversity refers to the differences in accounting rules and standards, recording, reporting, and using financial information between countries.

According to financial experts in accounting principles, the accounting diversity can be noticed in many accounting practices such as:

Differences in the financial statements included in the business annual report
Differences in the format used to present individual financial statements
Differences in the level of detail provided in the financial statements
Terminology differences
Disclosures differences
Recognition and measurement differences

These and other differences usually affect international business deals, expansion, and investment chances.

Most worldwide financial studies held by accounting principles experts find the following six main reasons for the existence of Accounting Diversity:

Reason 1: Legal System

The country's legal system is the most effective reason for the diversity of accounting principles from one country to another. Worldwide, two major types of legal systems used:

The Common Law: Used by English Speaking countries
The Codified Roman Law (Code Law): Used by Non-English-Speaking countries

Common law countries rely on a limited amount of statute law. A corporation law in countries that practice common law lays the basic framework, while accounting regulations are established by an independent professional organization (non-governmental financial organization).

Code law countries tend to have relatively more statutes. A corporation law establishes the legal parameters governing business and stipulates which financial statements must be published following a prescribed format. Accounting measurement and disclosure rules are included in accounting law.

Reason 2: Taxation

In some countries, published financial statements form the basis for taxation, but in other countries, financial statements are adjusted for tax purposes and presented to the government separately from the reports sent to stockholders.

Reason 3: Inflation

The countries experiencing high rates of inflation found it necessary to adopt accounting principles that required the inflation adjustment of historical cost amounts.

Adjusting income for inflation is especially important in those countries in which accounting statements serve as the basis for taxation; otherwise, companies will be paying taxes on fictitious profits.

Reason 4: Providers of Accounting and Financing

The difference between financing providers for business enterprises as family members, banks, governments, shareholders, and stockholders affects the financial report that financing providers seek and need.

Stockholders are more interested in profit (emphasis on the income statement) and banks are more interested in insolvency and liquidity (emphasis on the balance sheet).

Reason 5: Political and Economic Ties

Political and economic relations and history between countries can affect the accounting principles in the country. For example, many countries adopted an accounting framework because of colonialism in the previous centuries.

Also, the current alliances and ties between countries have a significant impact on accounting principles in many countries.

Reason 6: Correlation of Factors

Most of the previous reasons have a high degree of correlation, you will find an obvious correlation between the country's legal system, tax conformity, and source of financing.

Common law countries tend to have greater numbers of domestic listed companies, relying more heavily on equity as a source of capital. While code law countries tend to link taxation to accounting statements and rely less on financing provided by shareholders.

How can TallyPrime help?

TallyPrime is carefully designed to provide insightful reports. With a wide variety of insightful business reports, taking into consideration the differences in accounting, reporting, and using financial information between countries.

TallyPrime provides fully smart integrated solutions that can support your business growth based on globally accepted accounting and finance standards with its integrated features including:

Choose to generate invoices either only in English or Arabic
Complete flexibility to suit different purchase and sales processes

Supports different billing formats
Multi-Currency Support to record invoices, quotations, orders, accept payments and receive bills
Multiple Price Levels for products to create different price levels such as Wholesaler, Retailer, Customer, etc