Accounting Standards: Nature of Accounting Standards

  

What are Accounting Standards?

Accounting standards are written set of common principles, standards and procedures.

Accounting institutions issue these standards for the preparation of uniform and consistent financial statements

It defines the basis of financial accounting policies and practices.

Accounting standards improve the transparency of financial reporting.

Accounting standards apply to entire financial picture such as assets, liabilities, revenue, expenses and shareholders’ equity.

Its users like banks, investors, creditor and regulatory agencies depend on accounting standards to ensure information about a given entity is relevant and accurate.

 

Nature of Accounting Standards

According to the accounting standards, natures are guide, dictator, service provider and harmonizer.

Serve as a guide to the accountants

Accounting standards serve to the accountants as a guide in the accounting process.

These standards provide basis on which accounts are prepared.

For example, they provide the method of valuation of inventories in FIFO or LIFO; depreciation charge on assets as SLM or DMB.

 

Act as a dictator

Accounting standards act as a dictator in some accounting.

Like a dictator,

In some accounting areas, accountants have no choice to opt for practices format other than stated in the accounting standards.

For example, cash flow statement and final accounts of a limited company should be prepared in the format prescribed by accounting standard.

 

Serve as a service provider

Accounting standards include many guidelines for the accountants.

These standards issue certain terms and requiring standards.

They also explain numerous disclosures and implementation date.

Thus, accounting standards serve as a service provider.

 

Act as a harmonizer

Here, harmonizer means a mediator who brings one thing into harmonious agreement with another.

Accounting standards are not biased and bring uniformity in entire accounting methods.

These standards remove the effect of diverse accounting practices and policies.

In many cases, accounting standards provide solutions to specific accounting issues and clears conflict on accounting issues.

Thus, accounting standards act as harmonizer and facilitate solutions for accountants.

 

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Basic Journal Entries	http://tiny.cc/8aakkz
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Ledger Account	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cash Book	http://tiny.cc/889jkz
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Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
Depreciation	http://tiny.cc/ugakkz
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Significance and Need of Accounting Standards

Uniformity in accounting

Accounting Standards provides rules and principles for standard recording of financial transactions.

They have standard formats for financial statements.

All the organizations record their financial statements in same formats.

Therefore, accounting standards have uniformity in accounting methods.

 

Improves reliability of financial statements

There are many shareholders in a company.

They depend on the financial statements for the information of the company.

Many shareholders take their decisions on the data provided by financial statements.

There are also potential investors who make their investment decisions based on such financial statements.

The Accounting Standards ensure that these financial statements present a true and fair picture.

Therefore, accounting standards make sure the statements are reliable and trustworthy.

 

Prevents frauds and accounting manipulations

Accounting Standards determine (lay down) that all entities must follow same accounting rules, principles and procedures worldwide.

Following these standards is not optional, it is compulsory.

By following similar methods by entire organization, the management of an entity cannot manipulate with financial data.

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.

 

Assists auditors

Accounting standards determine (lay down) all the accounting policies, rules, regulations etc in a written format.

These policies have to be followed while preparing financial statement.

Therefore, when an auditor checks that the policies have been correctly followed, he can be assured that the financial statements are true and fair.

 

Comparability

This is another major objective of accounting standards.

By flowing accounting standards, all organizations of the country follow the same set of standards for their financial accounts, it becomes comparable to some extent.

The users of the financial statements can compare and analyze the financial performances of different companies before taking any decisions.

User also can compare two statements of the same company from different years.

This will show the growth curve of the organization to the users.

 

Determining managerial accountability

The accounting standards help to measure the performance of the management of an organization.

It can help measure the management’s ability to increase profitability and important financial duties of the management.

Management also must wisely choose their accounting policies.

 

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