Accounting Standards Definition
Accounting aids in gathering data regarding a company's financial position and statements. It is regarded as a business language requiring consideration and adherence to a standard. There is enough proof that practical existence existed during the Vedic era. Price, scale, and merchant are all mentioned in the Rigveda. There are traces of evidence mentioning the existence of accounting books in the accountants' office, even in Kautilya's Arthashastra. The Accounting Standards (AS) provides the framework for this rule. Let's look at it.
.Accounting Standards (AS)
Basic policy papers are Accounting Standards (AS). Their main goal is to guarantee the financial statements' reliability, consistency, transparency, and comparability. They accomplish this by harmonizing a country's or economy's accounting standards and practices. As a result, if organizations adhere to these accounting rules, all transactions will be documented similarly. These Accounting Standards (AS) are published by a regulatory authority, an accounting body, or occasionally the government itself. The Institute of Chartered Accountants of India (ICAI) is the organization in India that publishes the Indian Accounting Standards.
Accounting Standards primarily address four key accounting issues:
Accounting Standards Goals
Accounting is frequently referred to as the language of business because it informs others of the company's financial situation. The same syntax and grammar rules apply here in every language.
They are a nation's foundation for accounting and reporting norms and regulations. Let's look at the key goals behind developing these standards.
Main Accounting standards types
Institutions, both domestically and outside, must comply with many accounting standards, including:
GAAP is the main accounting rule set by public and private organizations in the United States. All publicly traded corporations are required to adhere to GAAP. Comparison of the financial standings of various businesses is also possible if GAAP is adhered properly. Regulatory agencies can efficiently oversee private enterprises thanks to GAAP standards, giving banks and investors the information they need to make wise business decisions.
Ten fundamental principles of GAAP serve as a roadmap for businesses' accounting procedures:
Benefits of Accounting Standards
1. Achieves Accounting Uniformity
When a corporation documents a transaction, it must, at all costs, abide by the norms and guidelines provided by accounting standards. To maintain uniformity throughout the accounting process, they employ different values for each organization and a standard structure for financial reporting. Since the reports are based on accounting standards that adhere to the presentation format without confusion, stakeholders can analyze them more easily. Additionally, they lessen the usage of alternative accounting practices.
2. Enhances Financial Statement Reliability
A corporation has numerous stakeholders who rely on the financial statements for information. The information given by these financial accounts serves as the foundation for many of these stakeholders' decisions. Additionally, some potential investors base their investment decisions on these financial statements.
Therefore, these statements must give a true and fair image of the company's financial status. This is guaranteed by the Accounting Standards (AS). They confirm the integrity and credibility of the claims.
3. Avoids Fraud and Accounting Fraud
All organizations must adhere to the accounting principles and procedures outlined in Accounting Standards (AS). For example, this prevents financial data from being manipulated by an entity's management. It is necessary and not discretionary to abide by these criteria. Therefore, it is challenging for management to present any financial information due to these standards falsely. Even committing fraud becomes more difficult for them as a result.
4. Helps Auditors
The accounting standards now provide a formal format for all accounting policies, rules, regulations, etc. These regulations must be followed. Therefore, an auditor can be confident that the financial statements are true and fair if he confirms that the policies have been correctly followed.
Another important goal of accounting standards is this. Since every organization in the nation adheres to the same standards, their financial statements are somewhat comparable. Before making any decisions, the users of the financial statements can evaluate and compare the financial performances of various companies. Additionally, you can compare two statements from the same company from different years. Thanks to this, users can see the company's growth curve.
6. Determining Managerial Accountability
Accounting standards aid in measuring an entity's management performance. It can be used to assess the management's capacity to boost profitability, uphold the company's solvency, and perform other crucial financial obligations.
Management must make good accounting policy decisions as well. The user of these financial statements becomes confused due to ongoing changes in accounting policies. Additionally, the concepts of comparability and consistency are lost.
Accounting Standard Limitations
Additionally, Accounting Standards have some restrictions. The regulatory agencies are continually updating the standards to lessen these restrictions.
1. Rigid and unyielding
Making the financial statement inflexible means that nobody may change it to their liking because policies have already been defined and must be adhered to at all costs by the company. The format must be followed as it has already been specified. It is hence incapable of adapting.
2. Subvert The Principle
Due to lobbying or political pressure on accountable organizations, the accounting standard can occasionally be violated even with numerous restrictions. This is because either the government or a top official only wants to help out big, powerful firms or if they have a personal stake in it. Standards are compromised and cannot be entirely relied upon, which is a significant drawback.
3. Limited Scope
The laws and statutes must take precedence over accounting standards. They must be written within the parameters of the applicable legislation. This may restrict their ability to offer the appropriate policies.
4. It's Hard to Pick an Alternative
There are numerous methods for entering transactions in the books of account, making it challenging to choose which method to employ and which to exclude. This makes it even more challenging to access when performing qualitative analysis. Additionally, due to restrictions on the method of choice, the entity might be forced to switch to a secondary method of documenting transactions rather than using its preferred method, resulting in a loss of quality and efficiency.
5. High Time Consumption
Due to the extensive, time-consuming process that each note and schedule must undergo while complying with accounting standards, the process takes time. It frequently raises the likelihood of errors. With the repeated performance of the same work, the test becomes a need that becomes an obligation, and time-consuming. The task must be completed twice: once during execution and again during its verification of accuracy.
Who establishes accounting principles?
Many organizations establish different regional accounting standards. The main groups that determine international and American accounting standards are as follows:
The Financial Accounting Systems Board (FASB) is a non-profit, impartial organization primarily responsible for creating accounting standards for American businesses. The FASB creates guidelines based on GAAP principles relevant to for-profit and non-profit businesses. The FASB Accounting Standards Codification is an online archive of the organization's standards.
A non-profit organization with its headquarters in London is the International Financial Reporting Standards Foundation (IFRS). The IFRS Foundation's core objectives include creating, preserving, interpreting, and updating accounting standards for businesses worldwide. The IASB is another worldwide accounting organization that this foundation governs. The standards of the IFRS Foundation comprise IFRS standards, IAS standards, and various committees' interpretations of these standards.
A division of the IFRS Foundation, the IASB is an organization that sets accounting standards. They are a non-profit group that is unrelated to any one national government. The IASB's main objective is to provide universal accounting standards across international borders.
The U.S. government's Security and Exchange Commission (SEC) oversees the stock market. Its main responsibilities are to uphold financial regulations, safeguard investors, and stop market manipulation. The SEC, which delegated the responsibility of establishing accounting standards to the FASB, receives financial reports from all publicly traded corporations in the United States. The two organizations cooperate to ensure the public can access clear and consistent financial information.
The American Institute of Certified Public Accountants (AICPA) is the national professional organization for CPAs in the United States. The AICPA establishes standards for its members, including professional standards of behavior and auditing standards. Additionally, it offers CPAs support and credentials for their profession.
The Governmental Accounting Standards Board (GASB), a commercial organization, develops accounting guidelines for American government organizations. It establishes standards based on GAAP principles, much like the FASB. GASB standards are used by local, state, and federal governments for financial reporting.
A private organization controls the FASB and the GASB called Financial Accounting Foundation (FAF). It supports these groups and collaborates with them to develop GAAP guidelines for both private businesses and governmental entities. The Governmental Accounting Standards Advisory Council (GASAC), which advises GASB, and the Financial Accounting Standards Advisory Council (FASAC), which offers advice to FASB, are two other branches of the FAF.
To sum up, accounting standards are essential rules that maintain uniformity and openness in financial reporting. The primary benefit of accounting standards is that they improve consistency and comparability in financial reporting, facilitating informed decision-making by investors and other stakeholders. Additionally, they assure users of financial statements that the data being presented is accurate and reliable. The drawback of accounting standards is that they can be difficult to execute and cost a lot of money, which can be difficult for small businesses. Additionally, accounting standards might be slow to adjust to new problems and not always keep up with evolving business practices. Nevertheless, accounting standards are crucial for preserving the accuracy of financial reporting and guaranteeing corporate accountability.