Accounting Standard is the grounded principle of doing accounts in common parlance by literally any concern, be it a corporate or even an individual. These are the set of common principles, accounting standards that should be followed and the simple procedures while doing the accounts which define the basis of the financial accounting policies and its practices.
The standards improve the clarity of financial reporting in all the countries, including our nation. In the States, the GAAP is being introduced which forms a set of accounting standards that are widely accepted for preparing the financial statements. In our discussion we will know about the standards, benefits and usages.
Accounting Standards Benefits
The ruling authority in the world of accounting is gained by these Accounting Standards. The standards make sure that the information which is provided to the potential investors is no-where misleading. Accounting Standards have benefit of their own which we will see in the following section:
1. Uniformity in Accounting is Ensured
Accounting Standards provide with the rules for the standard treatment of accounting and recording the accounting transactions. The standards even have a distinct format for the financial statements, this is the step in attaining the financial uniformity.
2. Financial Statements Can be Relied on
The stakeholders in a company rely on the financial statements for their information. The stakeholders base their decisions on the data that is provided by these financial statements. Also, the potential investors make their investment decisions on these financial statements.
Hence, it is essential for these statements to present a true and fair picture of the financial situation of the company.
3. Frauds and Manipulations of Accounting are Prevented
Accounting Standards have laid down the accounting principles and the methodologies which are followed by all the entities. This ensures that the management of an entity cannot manipulate the financial data. These standards are to be mandatorily followed and not be treated as optional.
These standards make it less possible for the management to misrepresent any financial information. While, it even makes it harder for the companies to commit any frauds.
4. Assist the Auditors
the accounting standards have laid down all the accounting policies, rules, regulations, etc in a written format. The policies need to be followed. So, if an auditor checks the policies they need to be correctly followed and be assured that the financial statements are true and fair.
5. Comparability
Another major objective of accounting standards is that it should be comparable. All entities of the country are required to follow the same set of standards to make their financial accounts comparable to some extent, this will help the users of the financial statements to analyse and compare the financial performances of various companies before taking any financial decisions.
6. Determining Managerial Accountability
The accounting standards help to measure the performance of the management of an entity. This measurement can help the management’s ability to increase the profitability, maintain the solvency of the corporate firm. Also, help with other such important financial duties of the management.
The business management also must wisely choose their own accounting policies. There are constant changes in the accounting policies which leads to confusion for the user of these financial statements. Then, the principle of consistency and comparability are lost.
Formulation of Accounting Standards in India
In the year 1977, the government passed a statute according to which the Accounting Standard Board (ASB) was responsible for the formulation of the accounting standards in India. The ASB took a brief look at the functioning of the same and the procedure which is behind the formulation of the accounting standards in India.
FAQs on Accounting Standards: Importance and Overview
1. What are Accounting Standards in simple terms?
Think of Accounting Standards as a set of official rules or guidelines for financial accounting. They ensure that all companies prepare and present their financial statements, like the Profit and Loss Account and Balance Sheet, in a consistent and uniform way. This makes the financial information reliable and easy to understand for everyone.
2. What are the main objectives of having Accounting Standards?
The primary objectives of Accounting Standards are to:
- Standardise the different accounting policies and practices being used.
- Ensure transparency, consistency, and comparability of financial statements.
- Provide reliable financial information to users like investors, creditors, and the government.
- Enhance the overall quality and credibility of financial reporting.
3. Why are Accounting Standards considered so important for businesses?
Accounting Standards are crucial because they bring credibility and uniformity to financial reporting. They help businesses by:
- Improving the reliability and accuracy of their financial statements.
- Making it easier to compare their financial performance with other companies.
- Helping prevent fraud and manipulation of financial data.
- Providing a standard framework that is accepted by auditors, tax authorities, and investors.
4. How do Accounting Standards help in comparing the performance of two different companies?
Accounting Standards act like a common language for financial reporting. When all companies follow the same rules for things like valuing inventory or depreciating assets, their financial statements become directly comparable. This allows investors and analysts to accurately assess the financial health and performance of one company against another without being misled by different accounting methods.
5. Can you give some examples of key Accounting Standards used in India?
Some important Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI) include:
- AS 1: Disclosure of Accounting Policies.
- AS 2: Valuation of Inventories.
- AS 9: Revenue Recognition.
- AS 10: Property, Plant and Equipment.
- AS 26: Intangible Assets.
These standards provide specific rules for handling key areas of accounting.
6. Are there any limitations or downsides to using Accounting Standards?
Yes, while very useful, Accounting Standards do have some limitations. For instance, they can be rigid and may not allow a company to present information in a way that better reflects its unique situation. Also, since standards sometimes allow for a choice between different methods, it can still lead to some level of non-comparability between firms.
7. How are Accounting Standards different from Generally Accepted Accounting Principles (GAAP)?
This is a common point of confusion. Generally Accepted Accounting Principles (GAAP) refer to the broad, overall framework of accounting rules and conventions. Accounting Standards (AS) are the specific, detailed written policies issued by an official accounting body. Think of GAAP as the 'constitution' of accounting, while Accounting Standards are the specific 'laws' within that constitution.
8. Who is responsible for setting up Accounting Standards in India?
In India, the Accounting Standards Board (ASB) is responsible for formulating Accounting Standards. The ASB was set up by the Institute of Chartered Accountants of India (ICAI). The ASB considers the applicable laws, business environment, and international best practices while developing these standards for Indian companies.
