IFRS accounting represents bookkeeping based on international financial reporting standards.
What is the difference between IFRS and cash based (cash inflow/outflow on bank account) accounting?
In order to better see the difference, let’s discuss an example. Assume company, that manufactures furniture, carries out all its transaction through its bank account and has no cash-on-hand transactions. At the end of January, the company manager logs into internet bank and sees that during January: GEL 100,000 was received from clients on the bank account. On the other hand, the company transferred GEL 70,000 to its suppliers and paid GEL 10,000 in monthly salaries. Based on this, the manager concludes that company’s profit during January comprised GEL 20,000. This conclusion, which is based on the bank account turnover, is wrong and does not reconcile with IFRS accounting due to the following three reasons:
1. Apart from usual orders, in January, the company received orders from client firms on manufacturing and delivering furniture within the next two months. To fulfill the order, the company requested GEL 40,000 advance from the client firms and received the amount in January. Therefore, from total of GEL 100,000 that was received from clients in January, GEL 40,000 represented advances received from clients. As a result, the company’s actual revenue for January was not GEL 100,000 but GEL 60,000 (advances received from clients, GEL 40,000, represent next two-month revenues based on IFRS).
2. To fulfill the above discussed order within the next two months, the company ordered wooden materials to its suppliers for aggregate value of GEL 18,000. The materials were agreed to be delivered by the suppliers within the next five weeks. Therefore, out of GEL 70,000 transferred to suppliers, GEL 18,000 represented prepayments for materials to be received in the future. As a result, the company’s actual material expense for January was not GEL 70,000 but GEL 52,000 (prepaid amount, GEL 18,000, represents expense for the coming months).
3. From total transferred salary of GEL 10,000 in January, GEL 1,500 represents salary prepaid to one of the company’s employees. The employee asked manager to pay him next month’s salary in advance due to some urgent personal needs. As a result, the company’s actual salary expense for January was not GEL 10,000 but GEL 8,500 (prepaid amount, GEL 1,500, represents expense for the next month).
Conclusion
To sum up, in accordance with IFRS, the company’s loss for January was GEL 500 (GEL 60,000 revenue minus GEL 52,000 material expense and minus GEL 8,500 salary expense) and not profit of GEL 20,000. Unlike bank account turnover, IFRS enabled the company to see the actual financial result for the month.
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