What Is an Accounting Standard?
An accounting standard is a common set of principles, standards and procedures
that define the basis of financial accounting policies and practices. Accounting
standards improve the transparency of financial reporting in all countries.
( Ref:- https://www.investopedia.com)
Accounting Standards (AS) are basic policy documents. Their main aim is to
ensure transparency, reliability, consistency, and comparability of the financial
statements. They do so by standardizing accounting policies and principles of a
nation/economy. So the transactions of all companies will be recorded in a
similar manner if they follow these accounting standards.
These Accounting Standards (AS) are issued by an accounting body or a
regulatory board or sometimes by the government directly. In India, the Indian
Accounting Standards are issued by the Institute of Chartered Accountants of
India (ICAI).
Accounting Standards mainly deal with four major issues of accounting, namely
i. Recognition of financial events
ii. Measurement of financial transactions
iii. Presentation of financial statements in a fair manner
iv. Disclosure requirement of companies to ensure stakeholders are not
misinformed
Objectives of Accounting Standards
Accounting is often considered the language of business, as it communicates to
others the financial position of the company. And like every language has
certain syntax and grammar rules the same is true here. These rules in the case
of accounting are the Accounting Standards (AS). They are the framework of
rules and regulations for accounting and reporting in a country. Let us see the
main objectives of forming these standards.
1. The main aim is to improve the reliability of financial statements. Now
because the financial statements have to be made following the
standards the users can rely on them. They know that not conforming to
these standards can have serious consequences for the companies.
2. Then there is comparability. Following these standards will allow for
inter-firm and intra-firm comparisons. This allows us to check the
progress of the firm and its position in the market.
3. It also looks to provide one set of accounting policies that include the
necessary disclosure requirements and the valuation methods of various
financial transactions.
Benefits of Accounting Standards
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
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.
(Ref: https://www.toppr.com)
