Concept of Accounting Standards
Accounting is the language of business. It may also be stated that accounting is the language of all other organisations. All financial information (i.e. nature of financial activities, financial position, financial results, present trend and further prospects etc.) are available through accounting.
- As such, it becomes necessary to develop some GAAP (Generally Accepted Accounting Principles) while preparing the financial statements by which the language of the business can be communicated to the users.
- In recent years, due to the growth of multinational corporations, certain international standards are required in order to avoid confusion relating to the financial status and operating results.
- Thus, there are some principles which are formulated or developed in this regard and which are approved by the specialised bodies are known as “Accounting Standards.” Practically, it will help us to assess the progress or otherwise of a firm after comparing the actual performances with the standard.
- Accounting Standard may be defined as the accounting principles and rules which are to be followed for various accounting treatments while preparing financial statements on uniform basis and which will reveal the same meaning to all the interested groups who will use the same. Thus, the Standards are considered as a guide for maintaining and preparing accounts.
Need of Accounting Standards
- Comparison between two firms is possible if both of them maintain the same principle, otherwise proper comparison is not possible.
- The firms are not allowed to maintain and present their accounts according to their own will or choice or cannot prepare report of financial statements for various interested groups. The same is possible only when there is some fixed standard for setting practice.
- The Accounting Standards recognise the principle of equity applicable for different users of accounting information, viz. creditors, investors, shareholders etc. Thus, the purpose of setting Accounting Standards is nothing but to find a uniformity in accounting practice while formulating financial reports and make consistency and proper comparison of data which are contained in financial statements for the users of accounting information.
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. 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.
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.
5.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.
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.
Accounting Standard Board of India
- On 21st April 1977, The Institute of Chartered Accountants of India, as a premier accounting body in our country, set up the “Accounting Standard Board” (ASB) to harmonies the diverse accounting policies and practice prevalent in our country.
- The primary duty of ASB is to formulate the accounting standards for India. These standards may be established by the Council of the Institute in India.
- During formulation of accounting standards, the ASB considered the applicable laws, usages, customs and the business environment existing in our country. For this purpose ASB took the valued views and guidelines of various industrial houses, the Government, and other interested parties.
- The body consists of the following members: Company Law Board, CBDT, Central Board of Excise and Customs, Controller General of Accounts, SEBI, Comptroller & Auditor General of India, UGC, Educational and Professional Institutions, Council of the Institute and representatives of Industry, Banks.
- The Accounting Standards will, however, be issued under the guidance of the Council. As such, ASB has given the authority of propagating the Accounting Standards and instituting the parties to prepare and present the accounts on the basis of Accounting Standards.
- ASB will explain the basic concepts on which accounting principles should be oriented and will also explain the accounting principles on which the practice and procedures should conform while performing its functions.