Introduction
While discussing the importance of stakeholders within any given realm of financial investment and procedure, it is imperative to consider that the aspect of financial statement plays an important role in financing. Therefore, when the question of “What do you mean by accounting standards?” gets addressed, it is imperative to analyse the question with regards to accounting procedures along with their explanations.
So, to understand accounting, these terms and procedures will be briefly discussed beforehand. Therefore, with regards to the question of “What are Accounting standards?” the answer shall be discussed here on.
What is meant by Accounting?
To put it bluntly, accounting can be defined as the activity of measuring, processing and communicating financial as well as non-financial information with regards to the economic facets of businesses and corporations. Therefore, accounting refers to the process of keeping track and records of the transactions that occur at a business.
What is Accounting Standards?
In order to proceed with the discussion of understanding accounting standards objectives benefits limitations, the aspect of accounting standards must be defined upfront. Accounting Standards (AS) are generally defined as authoritative standards with which financial statements are presented, measured, disclosed and recognized for transactions that occur within the market.
Accounting standards are, in effect, the primary source for the Generally Accepted Accounting Principles or GAAP. And that is where the second question of “What is GAAP?” arises. Let us, therefore, define GAAP.
What is GAAP?
Generally Accepted Accounting Principles or GAAP are referred to the financial practices and procedures that are used primarily in the United States and are interchangeably known as U.S. GAAP. The utilization of GAAP enables businesses in a market to conduct their operations through presenting financial reporting to existing and potential investors in order for them to make ethical and rational decisions regarding financing, investment, credits, etc.
However, as stated above, GAAP is the most used in the United States and although it has proven to be largely effective, other nations have resorted to a newer accounting standard, known as IFRS which leads to the question “What is IFRS in Accounting?” Therefore, this accounting standard shall thereby be discussed here on.
What is IFRS?
According to its definition, IFRS or the International Financial Reporting Standards are used to refer to the accounting standards that have been issued in order to describe a company’s performance in an industry or market with regards to its financial stability and market positioning. The Indian Accounting Standards cater to this financial reporting process as well.
What is Ind AS?
As stated earlier, the Indian Accounting Standards or Ind AS refers to the financial reporting standards that are used in India with regards to the processing and recording the financial proceedings in businesses and corporations of India.
What is International Accounting?
International accounting is referred to the older accounting standards which were put into use in order to promote transparency and compatibility among businesses.
What is Hedge Accounting?
In the practices of accountancy, Hedge accounting is referred to the specific practice of providing an account of the profit and/or loss of market entries.
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FAQs on Objectives and Benefits of Accounting Standards
1. What are accounting standards?
Accounting standards are a common set of principles, rules, and procedures that define the basis of financial accounting policies and practices. Think of them as a common language for businesses to report their financial information. This ensures that the financial statements of different companies are consistent, comparable, and easy to understand.
2. What are the main objectives of accounting standards?
The primary objectives are to:
- Ensure uniformity in preparing and presenting financial statements.
- Provide a set of standard accounting practices to make financial information more reliable and credible.
- Prevent fraud and manipulation by setting clear rules for financial reporting.
- Help auditors and users of financial statements (like investors) understand and compare the performance of different companies.
3. How do businesses benefit from following accounting standards?
Following accounting standards brings several benefits. It enhances the credibility and reliability of their financial statements, making it easier to attract investors and secure loans. It also allows for meaningful comparison with other companies in the same industry, helping in performance evaluation. Finally, it promotes better internal control and financial discipline within the company.
4. What is the main difference between IFRS and Indian Accounting Standards (Ind AS)?
IFRS (International Financial Reporting Standards) are global accounting standards used by over 140 countries. Indian Accounting Standards (Ind AS) are the standards adopted by companies in India, which are largely converged with IFRS. The main difference is that Ind AS includes certain "carve-outs" or modifications from IFRS to better suit the Indian economic environment. So, while they are very similar, they are not identical.
5. Why is it so important for all companies in an industry to use the same accounting standards?
If companies used different rules to report their finances, it would be impossible to compare them fairly. One company might look more profitable simply because it uses a different accounting method. Using the same standards, like Ind AS, creates a level playing field. It allows investors, lenders, and the government to accurately compare the financial health and performance of different companies before making decisions.
6. Can you give a simple example of how an accounting standard works?
A great example is the accounting standard for depreciation (like AS-10 or Ind AS 16). This standard provides specific rules on how a company must calculate and record the decrease in the value of its assets (like machinery or vehicles) over time. By following this standard, a company can't just randomly decide how much to depreciate an asset each year. This ensures the company's reported profit and asset values are realistic and consistent.
7. Who is responsible for setting Accounting Standards in India?
In India, the accounting standards are set by the Accounting Standards Board (ASB). This board was formed by the Institute of Chartered Accountants of India (ICAI). The ASB works to formulate standards that are in line with global practices while also considering the specific needs of the Indian business environment.
