Accounting standards may be defined as written statements, issued from time to time by institutions of accounting professionals, specifying uniform rules or practices for drawing the financial statements.
ACCORDING TO KOHLER
“Accounting standards are code of conduct imposed on accountants by custom, law or professional body.”
Accounting standards mainly deal with four major issues of accounting, namely
- Recognition of financial events
- Measurement of financial transactions
- Presentation of financial statements in a fair manner
- Disclosure requirement of companies to ensure stakeholders are not misinformed.
SERVE AS A GUIDE TO ACCOUNTANTS
These serve as a guide to the accountants and help them in maintaining the books of accounts. Example: The accounting standards tell about the method of valuation of inventories or stock and methods of providing the depreciation.
LAYS DOWN THE NORMS OR RULES
These lays down the norms or rules of accounting policies and practices by way of codes to direct as to how the transactions and events should be dealt in with accounts and disclosed in the financial statements.
PRESCRIBE PREFERRED ACCOUNTING TREATMENT
These prescribe the preferred accounting treatment from the available set of methods for solving one or more accounting problems.
FLEXIBLE IN NATURE
The Standards have been made flexible in the sense that where alternative accounting practices are acceptable, the companies are free to follow any of the alternatives suitable to them with a suitable disclosure. The consistency must be preferred in the adoption of a method chosen. In case of switching over to some other acceptable alternative method, the effect of such change must be quantified and disclosed.
OBJECTIVES OF ACCOUNTING STANDARDS
Accounting standards provide the accountants policies which are most suitable in a given situation. The objectives of Accounting Standards are:
IMPROVEMENT IN CREDIBILITY AND RELIABILITY OF FINANCIAL STATEMENTS
There are various parties which are interested in the accounting information of an enterprise. They include the investors, management, creditors, employees, government officials, researchers etc. It is therefore necessary that the financial statements present a true and fair view of the financial position and operating results of an enterprise. These standards generate confidence among the users of the financial information by providing a definite structure of uniform guidelines which enhance the reliability and credibility of the accounting information.
TO ENSURE CONSISTENCY AND COMPARABILITY OF FINANCIAL STATEMENTS
The Standards make the financial statements of different enterprises or of the same enterprise for different financial periods comparable. They bring the uniformity of assumptions, rules and policies adopted in the preparation of financial statements and thus they ensure the consistency and comparability of such statements which in turn ensures better comparison of profitability, financial position and future prospects of an enterprise.
TO RESOLVE THE CONFLICTS OF FINANCIAL INTERESTS AMONG VARIOUS GROUPS
Sometimes, there is a conflict of financial interests among the various groups interested in financial statements. For Example: Shareholders and creditors may have opposite interests in assessing the profitability and net worth of an enterprise. These standards are helpful in resolving such a conflict because financial statements are drawn up on the basis of accounting standards will be accepted to all the groups.
TO REDUCE THE CHANCES OF MANIPULATIONS AND FRAUDS
Adoption of the standards in the preparation of financial statements has reduced the chances of manipulations, frauds, insufficient disclosures or the use of inappropriate policies of accounts.
The adoption and application of Accounting Standards ensures uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements.