Accounting Standard is the grounded principle of doing accounts in common parlance by literally any concern, be it a corporate or even an individual. These are the set of common principles, accounting standards that should be followed and the simple procedures while doing the accounts which define the basis of the financial accounting policies and its practices.
The standards improve the clarity of financial reporting in all the countries, including our nation. In the States, the GAAP is being introduced which forms a set of accounting standards that are widely accepted for preparing the financial statements. In our discussion we will know about the standards, benefits and usages.
Accounting Standards Benefits
The ruling authority in the world of accounting is gained by these Accounting Standards. The standards make sure that the information which is provided to the potential investors is no-where misleading. Accounting Standards have benefit of their own which we will see in the following section:
1. Uniformity in Accounting is Ensured
Accounting Standards provide with the rules for the standard treatment of accounting and recording the accounting transactions. The standards even have a distinct format for the financial statements, this is the step in attaining the financial uniformity.
2. Financial Statements Can be Relied on
The stakeholders in a company rely on the financial statements for their information. The stakeholders base their decisions on the data that is provided by these financial statements. Also, the potential investors make their investment decisions on these financial statements.
Hence, it is essential for these statements to present a true and fair picture of the financial situation of the company.
3. Frauds and Manipulations of Accounting are Prevented
Accounting Standards have laid down the accounting principles and the methodologies which are followed by all the entities. This ensures that the management of an entity cannot manipulate the financial data. These standards are to be mandatorily followed and not be treated as optional.
These standards make it less possible for the management to misrepresent any financial information. While, it even makes it harder for the companies to commit any frauds.
4. Assist the Auditors
the accounting standards have laid down all the accounting policies, rules, regulations, etc in a written format. The policies need to be followed. So, if an auditor checks the policies they need to be correctly followed and be assured that the financial statements are true and fair.
5. Comparability
Another major objective of accounting standards is that it should be comparable. All entities of the country are required to follow the same set of standards to make their financial accounts comparable to some extent, this will help the users of the financial statements to analyse and compare the financial performances of various companies before taking any financial decisions.
6. Determining Managerial Accountability
The accounting standards help to measure the performance of the management of an entity. This measurement can help the management’s ability to increase the profitability, maintain the solvency of the corporate firm. Also, help with other such important financial duties of the management.
The business management also must wisely choose their own accounting policies. There are constant changes in the accounting policies which leads to confusion for the user of these financial statements. Then, the principle of consistency and comparability are lost.
Formulation of Accounting Standards in India
In the year 1977, the government passed a statute according to which the Accounting Standard Board (ASB) was responsible for the formulation of the accounting standards in India. The ASB took a brief look at the functioning of the same and the procedure which is behind the formulation of the accounting standards in India.
FAQs on Accounting Standards: Importance and Overview
1. What is the Function of ASB?
Ans. The Auditing Standards Board abbreviated as ASB is the AICPA's senior committee for the work of auditing, attestation, and the quality control that is applicable to the performance and the issuance of audit and attestation reports for the non-issuers.
Thus, while formulating the Accounting Standards, the ASB will take into consideration the applicability of laws, customs, usages and the business environment law that is prevailing in India.
2. What is Meant by Statute?
Ans. A law which is enacted by the legal branch of a government. The act of a corporation or of its founder who intends this as a permanent rule. Statute is a formal written enactment of a legislative authority which governs the legal entities of a city, state, or country by way of consent. Statutes are the rules that is made by the legislative bodies; which are distinguished from the case law or the precedent, that is decided by the courts, and the regulations which are issued by the government agencies.
The definition of a statute can also be the written law which is passed by a legislature or decree or by a ruler. Example: The legislature makes a law which establishes the rules for a specific type of taxation, this can be a taxation of law.
3. What are the Limitations of the Accounting Standards?
Ans. With the benefits, there are limitations as well of the accounting standards which may lead to rigidity, this cannot override the statute and the difference is accounting standards are bound to be there due to this difference in tradition and legal system valid in different countries.
