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.