An accounting standard is a common set of principles, standards,
and procedures that define the basis of financial accounting policies and
practices.Accounting standards are written policy documents issued by
expert accounting body or by Government or other regulatory body
covering the aspects of recognition, measurement, presentation and
disclosure of accounting transactions in the financial statements.
Accounting Standards are in the nature of a structural framework within
which credible financial statements can be prepared. These are formulated
with a view to harmonize different accounting policies and practices. The
objective of Accounting Standards is to reduce the accounting alternatives
in the preparation of financial statements within the bounds of rationality. It
ensures comparability of financial statements of different enterprises with a
view to provide meaningful information to various users of financial
statements. The Accounting Standards describes the accounting principles
and the methods of applying these principles in the preparation and
presentation of financial statements so that they give a true and fair view,
thus, leading to greater transparency and market discipline. Accounting
Standards also helps the regulatory agencies in benchmarking the
accounting accuracy
Benefits of Accounting Standards
Accounting Standards are the ruling authority in the world of
accounting. It makes sure that the information provided to potential
investors is not misleading in any way. Let us take a look at the benefits of
AS
1]Attains Uniformity in Accounting
Accounting Standards provides rules for standard treatment and
recording of transactions. They even have a standard format for financial
statements. These are steps in achieving uniformity in accounting methods.
2] Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the financial
statements for their information. Many of these stakeholders base their
decisions on the data provided by these financial statements. Then there
are also potential investors who make their investment decisions based on
such financial statements.
So it is essential these statements present a true and fair picture of the
financial situation of the company. The Accounting Standards (AS) ensure
this. They make sure the statements are reliable and trustworthy.
3] Prevents Frauds and Accounting Manipulations
Accounting Standards (AS) lay down the accounting principles and
methodologies that all entities must follow. One outcome of this is that the
management of an entity cannot manipulate with financial data. Following
these standards is not optional, it is compulsory.
So these standards make it difficult for the management to misrepresent
any financial information. It even makes it harder for them to commit any
frauds.
4] Assists Auditors
Now the accounting standards lay down all the accounting policies, rules,
regulations, etc in a written format. These policies have to be followed. So if
an auditor checks that the policies have been correctly followed he can be
assured that the financial statements are true and fair.
5] Comparability
This is another major objective of accounting standards. Since all entities of
the country follow the same set of standards their financial accounts
become comparable to some extent. The users of the financial statements
can analyze and compare the financial performances of various companies
before taking any decisions.
Also, two statements of the same company from different years can be
compared. This will show the growth curve of the company to the users.
6] Determining Managerial Accountability
The accounting standards help measure the performance of the
management of an entity. It can help measure the management’s ability to
increase profitability, maintain the solvency of the firm, and other such
important financial duties of the management.
Management also must wisely choose their accounting policies. Constant
changes in the accounting policies lead to confusion for the user of these
financial statements. Also, the principle of consistency and comparability
are lost.
Limitations of Accounting Standards
There are a few limitations of Accounting Standards as well. The regulatory
bodies keep updating the standards to restrict these limitations.
1] Difficulty between Choosing Alternatives
There are alternatives for certain accounting treatments or valuations. Like
for example, stocks can be valued by LIFO, FIFO, weighted average
method, etc. So choosing between these alternatives is a tough decision
for the management. The AS does not provide guidelines for the
appropriate choice.
2. Restricted Scope
Accounting Standards cannot override the laws or the statutes. They have
to be framed within the confines of the laws prevailing at the time. That can
limit their scope to provide the best policies for the situation.
