Limitations of Accounting Standards

What is Accounting Standards?

Accounting Standards simply refers to guidelines to be followed in the accounting system. It means rules & regulation that are to be followed while recording accounting & financial transactions.

It governs the manner in which financial statements are prepared & presented. The main aims of accounting standards are to bring uniformity & reliability in the whole accounting system. Accounting standards standardize the whole accounting procedure of economy.

All companies after adopting these accounting standards follow the same manner of recording transactions. This way the whole accounting system becomes easy & easily understood by all.

It prevents happening of any fraud by establishing certain norms & principles. Accounting standards are issued by accounting body of the respective country.

In India, Institute of Chartered Accountants of India formulate & issue Accounting standards. These standards are followed by accountants & companies in preparing & presenting financial statements.

Limitations of Accounting Standards

Limitations of Accounting Standards
Limitations of Accounting Standards

Accounting standards have important role in the accounting system. Apart from their importance, they have certain limitations also. Some of these limitations are discussed below:

Brings Inflexibility & Rigidity

It is one of the major disadvantage of accounting standards. Accounting standards basically establish each & every principles and rules for accounting treatment. Every company is required to follow the same principles constantly.

Therefore all companies are required to fit themselves into guidelines of accounting standards. Every companies goes through different situations & have different financial transactions. Sometimes it becomes difficult for them to follow the same guidelines.

Involves High Costs

Another disadvantage of following accounting standards is that it involves high costs. Implementing accounting standards in your accounting standards is too costly.

Company need to change their entire procedures, upgrade their systems & provide their employee’s training accordingly. Companies need to monitor whether employees are correctly following standards. All these activities require large costs for bringing changes.

Difficult to Choose Among Alternatives

Choosing among different alternatives available is another disadvantage of Accounting standards. Accounting standards provides many options for treatment of the same accounting concept.

It becomes difficult for companies to decide which one is best for them. Accounting standard does not clearly state that which one is the appropriate choice. For ex. for stock valuation there are 3 alternatives available. These are weighted average, FIFO & LIFO method. Choosing which one is best is difficult task.

Scope is Restricted

The accounting standards are followed in accordance with prevailing laws & statutes.  Accounting standards cannot override the statutes & laws. These standards are created & framed in accordance with prevailing laws. Using these standards as per the prevailing laws can limit & restricts their scope.

Time-Consuming

Another drawback of Accounting standards is that it is time-consuming. Implementation of accounting standards requires many steps to be followed to prepare financial report. It makes the process of preparing financial statements complex & time-consuming.

It defines each & every step for preparation of financial reports.  Accounting standards involves income statement, trial balance & balance sheet preparation. Accountants need to strictly comply with rules of accounting standards. It makes their work complex & rigid.

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