Advantages And Disadvantages of Accounting Standards

Accounting helps get information about a business's financial position and statements. As a business language, it is considered an information system that must consider and follow a standard for its functioning. There has been sufficient evidence of practical existence in the Vedic times. In Rigveda, there is a mention of scale, merchant, and price. Even in Kautilya's Arthashastra, shreds of evidence have been mentioned of the existence of books of accounts in the accountants' office.

Suppose standards, rules, or protocols do not bind the accounting process. In that case, there is a high probability of financial statements providing a misleading or distorted image of the business rather than the actual one.

Accounting Standards

A composed strategy explanation that addresses the part of acknowledgment, presentation, treatment, estimation, and exposure of accounting exchanges of budget reports is known as an accounting standard. The ICAI established this bookkeeping standard to provide consistency in all national accounting practices. Additionally, it provides valuation guidelines and disclosure policies that each association must adhere to. It improves the accuracy of accounting data and the similarity of intra- and entombs relationships.

These quite effective tests are used to evaluate businesses. The ASB (accounting standards board) and AASB (auditing and assurance standards board) assist in forming the accounting standards for overall functioning. The initial draft is prepared by the accounting standard board and auditing and assurance standards board based on observations for regulation to be included. Later, within their authority and capacity, the institute of chartered accountants of India approved the draft with the deadline for implementation. The international financial reporting standards and the International society of automation are considered while executing the standards. Also, the conditions of the local environment and practices are taken care of. The IASC does keep parity between international and Indian accounting standards. GAAP (generally accepted accounting principles) and IFRS (international financial reporting standards) are the two accounting standards. Generally accepted accounting principles have a hierarchy involved in the determination of their applications of four categories: Category A, Category B, Category C, and Category D.

Accounting principles have been in place for a long time now. These have got general acceptance and have never been a significant dispute. These have been accepted because of how well they cater to the needs and complement the functioning. Followings are qualities that testify to the reasons for the general acceptability of the standards.

• Relevance: Any principle is relevant if that stands on the parameters of satisfaction, which is true in the modern scenario. In accounting, the standards can only be relevant if they provide meaningful and useful information when used for the analysis of financial statements and reports that are prepared based on accounting standards.
• Feasibility: Complexity is a major reason for non-acceptance. In the case of the standards, cost becomes an additional parameter with complexity. So, these are only feasible if they can be applied without any complexity and do not add additional costs for providing financial pieces of information & reports with utmost accuracy about probable use and resulting benefits.
• Objectivity: A standard should be free from any biasness and not be subjective. It must be very clear with its objectives of formation. These standards must entertain verifiability, which means that these should be able to provide useful and correct information most of the application-based times.

Advantages Of Accounting Standards

1. Comparison between Two Organizations

The reports of the businesses follow the same format, so after reviewing the financial statements of each business, the users of the financial statements can make judgments based on the comparison. It won't be easy to compare the two firms if they employ distinct accounting procedures. As a result, the accounting standard allows for comparison whenever necessary. The standards are helpful in both intra-firm and inter-firm comparisons of operations and positions based on the accounting reports presented.

2. Uniformity in Accounting

Accounting standards provide rules and regulations that must be followed at all costs by the company while documenting a transaction. They use a common format for financial statements and separate values for each organization to ensure consistency throughout the accounting process. It becomes easier for stakeholders to analyze the reports as they are based on accounting standards that follow the presentation format without confusion. Also, these reduce the number of alternative practices adopted in for accounting process.

3. Increased Financial Statement Dependability

There is a standard structure for valuing financial statements, the user, external or internal, completely depends on this financial statement to make any choice. The notes to account also detail a firm's many contingencies and the working notes of the headings, making the system more visible and, as a result, adopting the trait of reliability.

4. Protect Fraud and Manipulation

As previously said, there is a fixed structure for the financial statement that no one can change or conduct fraud throughout the entire accounting process. As a result, the accounting standard has already decreased the possibility of manipulation and fraud while making the accounting system more effective and dependable.

5. Assist Auditors

The auditor's job is to determine whether or not the financial statements prepared by corporations adhere to the principles and norms established by accounting standards, because the accounting standard has already laid down the rules, procedures, and structure, it makes it easier for auditors to assess the financial statements. The quality of financial records improves as they become easily understandable.

6. Assessing Management Accountability

Accounting standards help determine managerial accountability by measuring the managerial component of the organization. It also assesses management performance and the capacity to increase profitability, preserve an entity's solvency, and fulfill other management obligations. Good management will be consistent in their procedures and rules to avoid confusing the user's thoughts.

7. Helps Resolve Conflicts

These standards cater to the facility to reduce conflict among various users of financial statements or information based on their interests. With this, these standards help in the assessment of management. In the absence of these, a proper analysis of the performance of the business can not be done, and so of the management.

Disadvantages of Accounting Standards

1. Rigid and Inflexible

Policies have already been established and must be followed by the entity at all costs; hence, making the financial statement rigid means that no one may modify it to their liking. The format has already been established, and it must be followed. As a result, it lacks adaptability.

2. Compromise the Standard

Sometimes, the accounting standard is compromised even in the presence of many regulations due to lobbying or government pressure on accountable institutions. This is because the government or a high authority only wants to grant benefits to large, powerful corporations or if they have some personal interest. As a result, standards are undermined and cannot be depended on fully, which is a very important disadvantage.

3. Selecting an Alternative is Difficult

There are several techniques for recording transactions in the books of account, it might be difficult to decide which method to use and which not to, which further makes it difficult to access when it comes to qualitative analysis. Furthermore, due to limitations in the method of choice, the entity may be forced to abandon its most convenient way, losing quality and efficiency, in favor of a secondary method of documenting transactions.

4. Time Consumption is High

The entire process of adhering to accounting standards takes time since each note and schedule must be prepared by the user and go through a lengthy, time-consuming process. Many a time, it increases the chances of mistakes. The examination becomes a necessity which also becomes an obligation and time-consuming, with repetition of the same task. The work has to be done twice, once the execution and the second that is its examination for correctness.

5. Scope is Limited

Accounting standards must be established following the rules in place in the country at the time keeping in the interest of local functionaries. They are unable to override the law. As a result, the scope for creating policies is limited, which becomes a hurdle to improvement.