Accounting standards : Meaning, List, Needs, Limitations

In general, while following financial accounting policies and practices, we have to follow some rules, principles, or standards regarding their functioning and applicability. Every financial transaction has some effect on the company. To ensure that this effect occurs in a positive and well defined manner, there are some rules which have to be followed. These rules are made after taking into consideration various aspects and effects of financial accounting and are termed accounting standards.

Meaning Of Accounting Standards

An accounting standard is a set of rules, practices, and policies that are used for the systematic preparation, presentation, and arranging of bookkeeping and other accounting functions. Accounting standards specify how transactions and other events taking place in an organization are to be recognized, measured, and presented and what procedure is to be followed for their disclosure in the financial statement. Accounting standards are generally authoritative standards that are the primary source of information and generally accepted accounting principles (GAAP). 

Accounting standards are applicable to the entire firm and include every financial aspect of a firm, such as assets, liabilities, revenue, expenses, shareholders’ equity, and all others. These principles generally lay down procedures that are to be strictly followed for the smooth and transparent functioning of an organization. Some common examples of accounting standards are:

  • Revenue recognition
  • Asset classification
  • Lease classification
  • A measure of outstanding shares
  • Goodwill accounting
  • Allowable methods for depreciation

Types Of Accounting Standards

There are basically two types of accounting standards, i.e., GAAP and IFRS.


GAAP stands for “generally accepted accounting principles” and is commonly known as a set of accounting standards that are mandatory to follow and regulate. These principles are basically concerned with the clarity of financial reporting and the clarity of comparison between the financial situations of different companies. It basically includes 10 principles that lay down the foundation of accounting and financial statements. These are:

  • The principle of consistency
  • The principle of regularity
  • The principle of sincerity
  • The principle of permanent methods
  • The principle of prudence
  • The principle of non compensation
  • The principle of periodicity
  • The principle of materiality
  • The principle of continuity
  • The principle of good faith


IFRS stands for international financial reporting standards and is the set of accounting standards used and followed by international companies. The basic objective of these principles is to provide consistency in the accounting and reporting processes of different companies residing in different parts of the world. There are 17 standards which fall under IFRS, which are as follows:

  • IFRS 1: Procedures Related to the First Time Adoption of International Financial Reporting Standards
  • IFRS 2: share based payments
  • IFRS 3: Business Combinations
  • IFRS 4: Insurance contracts
  • IFRS 5: noncurrent assets held for sale and discontinued operations
  • IFRS 6: Evaluation of mineral resources
  • IFRS 7: financial instruments: disclosure
  • IFRS 8: Operating Segments
  • IFRS 9: Financial Instruments
  • IFRS 10: Consolidated financial statements
  • IFRS 11: Joint Arrangements
  • IFRS 12: disclosure of interest in other entities
  • IFRS 13: Fair Value Measurements
  • IFRS 14: Regulatory Deferral Accounts
  • IFRS 15: revenue from contracts with customers
  • IFRS 16: leases
  • IFRS 17: insurance contracts

IFRS compliant also uses the following 25 International Accounting Standards for the smooth functioning and operations of their business.

  • IAS 1: preparation of financial statements
  • IAS 2: inventories
  • IAS 7: statement of cash flow
  • IAS 8: accounting policies, change in accounting estimates and errors
  • IAS 10:  events after reporting period
  • IAS 12: income taxes
  • IAS 16: property, plant and equipments
  • IAS 19: employee benefits
  • IAS 20: accounting procedures and rules related to government grants and disclosure of government assistance
  • IAS 21: procedures and rules related to the effects of changes in foreign exchange rates
  • IAS 23: borrowing cost
  • IAS 24: related party disclosure
  • IAS 26: rules and regulations related to accounting and reporting by retirement benefits plans
  • IAS 27: separate financial statement
  • IAS 28: rules and regulations related to investments in associates and join ventures
  • IAS 29: procedures related to financial reporting in hyper inflationary countries
  • IAS 32: financial instruments: preparation
  • IAS 33: earnings per share
  • IAS 34: interim financial reporting
  • IAS 36: impairment of assets
  • IAS 37: standards and procedures related to provisions, contingent liabilities, and contingent assets
  • IAS 38: intangible assets
  • IAS 39: financial instruments: recognition and measurements
  • IAS 40: investment properties
  • IAS 41:  agriculture

Lists of accounting standards

Accounting standards are basically formed for the uniform preparation of financial statements. These standards are mandatory to follow and issued by the Accounting Standards Board (ASB) and MCA. In the case of small and medium sized enterprises, accounting standards are issued by ASB. On the contrary, in the case of corporate entities, accounting standards are issued and regulated by the MCA.

Now, a question arises about how many accounting standards are there and what they stand for. So, there are 32 accounting standards at present, and each accounting standard is made for a different purpose. To understand every accounting principle in a better way, let us have a look at the following table. 

Accounting standard     Stands For                      Details
AS-1Disclosure of accounting policiesIt deals with various accounting policies that are prepared and presented in a financial statement by way of a separate statement or a particular note that forms a part of the financial statement. This is done to facilitate comparison between the financial statements of different companies.
AS-2Valuation of inventoriesThis standard deals with the values related to inventories, such as the cost of inventory in the financial statement, the assertion of such a cost, the written down value of inventory, and many others.
AS-3Cash flow statementThis standard deals with information related to cash flows, such as historical changes in cash and cash equivalents, the classification of cash flows from different activities, etc.
AS-4Procedures related to contingencies and events occurring after the balance sheet dateIt deals with all the events that are contingent in nature and occur after the balance sheet date.
AS-5Rules and regulation specifying Net profit or loss for the period, prior period item and changes in accounting policiesIt deals with the profit and loss that arises from ordinary activities, any extraordinary items, and prior period terms that are reflected in the profit and loss statement. Apart from this, it also reflects the accounting for changes in accounting estimates and in disclosure of changes in accounting policies.
AS-7construction contractsThis standard deals with the accounting and procedures related to the construction contracts that are included in the financial statements of contractors,
AS-9Revenue recognitionThis standard deals with all the principles and procedures that are related to the recognition of revenue in the statement of profit and loss. This standard is mainly concerned with the revenue that arises as a result of ordinary activities.
AS-10Property, plant and equipmentThis standard deals with all the possible ways for the treatment of property, plant and equipment related to business and other entities.
AS-11The effect of a change in foreign exchange ratesThis standard deals with the accounting for foreign currency transactions and other related foreign operations, such as which exchange rate should be used, how to recognise the financial statement and how to reflect the change in exchange rates.   
AS-12government grantsThese standards deal with accounting related to government grants in the form of subsidies, cash incentives, duty drawbacks, etc.
AS-13Accounting for investmentsThese standards deal with all the rules and procedures established for accounting investment, its realization and disclosure.
AS-14Accounting for amalgamationsThis standard deals with amalgamation and the best possible treatment for any resultant goodwill or reserves. 
AS-15Employee benefitsThis standard deals with all the possible and best defined accounting treatment of all employee benefits and their disclosure. But it is exclusive of accounting and reporting by employee benefit plans. 
AS-16Borrowing costIt deals with the borrowing cost of a firm. But, it does not include any kind of actual or imputed cost of the owner’s equity, which is in the form of either equity or preference share.
AS-17Segment reportingThis standard deals with the principal regarding the reporting of financial information about various aspects of the business, its products and services, and the different geographies in which it operates.
AS-18Related party disclosureThis standard applies where there is reporting in a related party relationship between a reporting enterprise and its related parties. It describes the related manner in which accounting statements are formed, consolidated, and presented.
AS-19LeasesThis standard deals with the lessees’ and lessors’ relationships that arise due to a contract of lease. It defines all the appropriate and related accounting policies for the formation and disclosure of statements related to finance leases and operating leases.
AS-20Earnings per shareThis standard deals with the determination and presentation of earnings per share.
AS-21Consolidated financial statementsThis standard is formed for establishing principles and procedures regarding the preparation, presentation, and disclosure of consolidated financial statements, representation of information about parent and its subsidiary companies, their combined capital, resources and balance sheets.
AS-22Accounting for tax on incomeThis standard deals with accounting treatment of taxes, taxable income, problems related to taxation,and problems associated with matching of taxes against revenue for a period.
AS-23Accounting for the investment in associatesThis standard is established in reference to accounting for investment in associates with the preparation and presentation of consolidated financial statements by an investor.
AS-24Discounting operationsThis standard deals with the information related to discounting operations to enhance the ability of a financial statement user to make projections related to an enterprise’s capacity, financial position, and assets and liabilities. This is done by segregating information about discounting operations from various other information available.
AS-25Interim financial reportingThis standard deals with the publication and requirement of interim financial reports. The objective of this standard is to prescribe well defined manners for the presentation of information, its recognition, and measurement in complete or condensed financial statements.
AS-26Intangible assetsThis standard deals with the treatment of intangible assets. It lays down the procedure and rules for their presentation and disclosure in the financial statement.
AS-27Financial reporting of interests in joint venturesThis standard deals with the principles and procedure for accounting related to joint ventures, their assets and liabilities, formation and regulation, and income and expenses in the books of ventures and investors.
AS-28Impairment of assetsThe word “imparied” is used for an asset when its carrying amount exceeds the amount to be recovered through the use or sale of that asset. The objective of this standard is to ensure that the assets are carried at no more than their recoverable amount, and the firm should recognise an impairment loss whenever it occurs.
AS-29Provisions, contingent liabilities, and contingent assetsThis standard deals with the appropriate recognition criteria and measurement bases related to provisions, contingent liabilities, and contingent assets. It states that relevant and sufficient information related to provisions, contingent liabilities, and contingent assets should be disclosed in the books of account.

NOTE: AS-6 (depreciation accounting), AS-8 (accounting for research and development), AS-30 (financial instruments: recognition and measurement), AS-31 (financial instruments: presentation), AS-32 (financial instruments: disclosure) ARE WITHDRAWN BY THE ICAI.

Objectives Of Accounting Standards

Accounting standards are not only the rules or procedures specified in a written form; in reality, they are considered the language through which a business communicates its financial position. Every language has specified grammar rules that prescribe a well defined structure for the presentation of a sentence; accounting standards also have some rules which present the financial information in a well structured form. Also, unlike any language that has an objective to fulfill, accounting standards, as an interim part of business, have various objectives to attain. These objectives are:

  1. To provide various standards, rules, and procedures for diverse accounting policies and principles and make them transparent.
  2. Providing all relevant, necessary and important information to the users.
  3. Improvement of the reliability of financial statements so that a user can rely on them without hesitation or issue.
  4. Making the comparison between two companies is easy by presenting the necessary information related to financial statements in a well structured form.
  5. Providing one set of accounting policies that regulates the necessary disclosure requirements and methods for the valuation of various financial transactions.

Needs For Accounting Standards

The need for accounting standards arises due to the high competition between companies. As competition increases, the need for rules, regulation, and preparation of fair, accurate, and absolute financial statements also increases. This need arises to prevent any kind of fraud on the users of financial statements and other outsiders. Accounting standards eliminate the probability of fraudulent activities by ensuring   transparency, reliability, consistency, and comparability of the financial statement. It also ensures that the working of a company is regulated in a prescribed manner and under the law.

The other reason or cause that accounts for the need for accounting standards is the variance between accounting principles and accounting practices. Both are different concepts and often clash with each other. Accounting standards provide a prescribed manner and establish uniformity among principles and practices.

Limitations Of Accounting Standards

Accounting standards have various limitations that make them a matter of concern. The regulatory body, from time to time, has tried a lot to cope with various limitations of the accounting standards. But, even still, it has some limitations, which are as follows:

Do not consider the time value of money

Time value of money represents the difference in the value of money you invested today and the value of money you get in future. It simply means that if $1 is equal to Rs. 55 today, then maybe in the future $1 will be equal to Rs. 75. It considers the difference in present and future values of money. However, accounting standards ignore these concepts and take into consideration only the present value of money.

Differences in approaches which make comparison difficult

Accounting standards lay down various methods of calculating depreciation, inventory, cash flows and other things that create differences in approaches. A company using the straight line method of depreciation has a completely different balance sheet, value of assets, and profits as compared to a company using the written down value method of depreciation. It also makes the comparison between the two companies difficult and complex.

Restrict the scope of a company

Accounting standards are formed by the statute of law and have to be framed within the boundaries of the law. Sometimes, its applicability, rules and procedures limit the company’s ability to act within the boundaries. This further limits the scope of a company for expansion, investment, and other related decisions.

Costly and time consuming

Implementation of accounting standards is very costly. This is because a company is required to change their entire procedure, update the system according to accounting standards, provide employee training on accounting standards specifically, and many other things. This also requires a continuous check on whether the accounting standards are followed accordingly or not. Moreover, it requires a series of steps to be followed wisely, which makes it a very time consuming process.

Applicability of accounting standards

For the applicability of accounting standards, enterprises are classified as corporate, i.e., companies other than those who are following Indian Accounting Standards and non corporate i.e., level 1, level 2, and level 3 companies.

Accounting standard  Corporate entitiesNon corporate entities
AS-1 Disclosure of accounting policiesApplicableApplicable
AS-2 Valuation of inventoriesApplicableApplicable
AS-3 Cash flow statementApplicableApplicable except on level 2 and level 3 companies.
AS-4 Contingencies and event occurring after balance sheet dateApplicableApplicable
AS-5 Net profit or loss for the period items and changes in accounting policiesApplicableApplicable
AS-7 Construction contractsApplicableApplicable
AS-9 Revenue recognitionApplicableApplicable
AS-10 Property, plant and equipmentApplicableApplicable
AS-11 The effect of change in foreign exchange ratesApplicableApplicable
AS-12 Accounting for government grantsApplicableApplicable
AS-13 Accounting for investmentApplicableApplicable
AS-14 Accounting for amalgamationApplicableApplicable
AS-15 Employe benefitsApplicableApplicable
AS-16 Borrowing costsApplicableApplicable
AS-17 Segment reportingApplicableApplicable except on level 2 and level 3 companies.
AS-18 Related party disclosureApplicableApplicable except on level 2 and level 3 companies.
AS-19 LeasesApplicableApplicable
AS-20 Earning per shareApplicableApplicable
AS-21 Consolidated financial statementApplicableRequired to be followed only if the non corporate entity voluntarily followed it. There is no compulsion to follow this standard strictly.
AS-22 Accounting for taxes on incomeApplicableApplicable
AS-23 Rules and procedures related to accounting for investment in associates in consolidated financial statementApplicableRequired to be followed only if the non corporate entity voluntarily followed it. There is no compulsion to follow this standard strictly.
AS-24 Discounting operationsApplicableApplicable except on level 3 companies
AS-25 Interim financial reportingApplicableApplicable
AS-26 Intangible assetsApplicableApplicable
AS-27 Financial reportingApplicableRequired to be followed only if the non corporate entity voluntarily followed it. There is no compulsion to follow this standard strictly.
AS-28 impairment of assetsApplicableApplicable
AS-29 Provision, contingent liabilities and contingent assetsApplicableApplicable