Meaning of 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 the 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 the 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.
Importance of Accounting Standards
Accounting Standards plays a very efficient role in the whole accounting system. Some of its important roles are discussed below:
Brings Uniformity in Accounting System
Accounting Standards are the one that helps in bringing the uniformity in whole accounting. It is one important advantage of accounting standards. Accounting standards sets the same rules & regulations for the treatment of accounting transactions.
It means that all companies record the transactions in the same manner. For example, Accounting Standard-6 governs the whole depreciation accounting. All companies will be following AS-6 for matters concerned with depreciation. This way it brings uniformity in whole accounting procedure.
Easy Comparability of Financial Statements
Accounting standards has made it simplified the comparison of different financial statements. Financial statements of two companies can be easily compared. If two companies are following different accounting system & format, comparison between them becomes quite difficult.
Like if one company follows LIFO method of stock accounting while others follows FIFO method. Here comparison becomes difficult as two are following different methods. Accounting standards helps in overcoming this problem.
Accounting standards helps the auditors in performing their duties. It simplifies their task & makes it easy for them to perform their roles. Accounting Standards have established different standards, rules & regulations to be followed by companies in their accounting system.
These rules & regulations are mandatory to be followed by every company. It governs the whole manner of preparing & presenting financial standards. So if auditor assures that company has followed accounting standards, he can easily verify that all financial standards are fair & true.
Makes Accounting Informative Easy & Simple
Simplifying the whole accounting information is important advantage of accounting standards. It provides standard rules for each & every accounting transaction. It removes all complexity in the accounting process.
Standard & uniform process is followed. It helps the users in easy understanding & avoids any misleads from it. For example, AS-3 clearly shows the rules regarding flow of cash under 3 main heads. These 3 heads are operating activities, investing activities & financial activities.
Avoids Frauds & Manipulations
Accounting standards plays an efficient role in preventing frauds in the accounting system. Frauds & any accounting data manipulation may adversely affects the organisation.
Accounting standards establishes different accounting rules & principles. These accounting principles govern the whole accounting procedure. These principles are not optional to be followed but are mandatory to be followed.
It becomes almost impossible to misrepresent & manipulate any financial data on part of management. Committing any fraud also become harder for them.
Provides Reliability to Financial Statements.
Financial statements are important source of acquiring information regarding companies. Investors & different stakeholders depends on these statements for getting information. These people take important decisions on the basis of this data only.
It is thus very important that these financial statements are true & fair. Accounting standards fully governs these financial statements. It is ensured by accounting standards that these statements are real & trustworthy.
Measures Management Performance
Accounting standards make it easy in determining accountability of management. It makes it easy to measure the performance of management team & provide any suggestions.
It helps in analysing management ability in maintaining solvency of the firm, increasing the company’s profit & various other important roles. It directs the management to adopt a particular accounting policy. Same policy should be followed constantly to avoid any confusion.