Significance of accounting standards8th January 2022 0 By indiafreenotes
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.
As a business owner, you understand that accounting has to be accurate, but you may not know why accounting standards the rules with acronyms such as GAAP and IFRS are such a big deal. If you were the only one who ever needed to see your accounting, they wouldn’t be, but investors and regulators may go over your ledgers, too. When you follow accounting standards, outsiders can understand what they’re reading.
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.
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.
Management also must wisely choose their accounting policies. Constant changes in the accounting policies lead to confusion for the user of these financial statements. Also, the principle of consistency and comparability are lost.
Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format. These policies have to be followed. So, if an auditor checks that the policies have been correctly followed, he can be assured that the financial statements are true and fair.
Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the financial statements for their information. Many of these stakeholders base their decisions on the data provided by these financial statements. Then there are also potential investors who make their investment decisions based on such financial statements.
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.
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.
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.
Also, two statements of the same company from different years can be compared. This will show the growth curve of the company to the users.