Accounting Standards: All You Need To Know

Accounting Standards: Ever thought about why financial reports are so consistent across different companies? The answer lies in accounting standards. But what exactly are accounting standards? Simply put, they define the principles, procedures, and rules for financial reporting.

These standards ensure uniformity and transparency in accounting practices, making financial information reliable for stakeholders. Accounting standards guide how businesses record and present their financial data, from assets to liabilities and revenue.

In this guide, we will delve into the meaning of accounting standards, their objectives, and the five key accounting standards. We will also discuss the advantages and disadvantages of these standards, along with the Indian Accounting Standards issued by ICAI.

Table of Contents

Understanding Indian Accounting Standards

Accounting standards define how businesses should record, measure, and present their financial transactions. These standards ensure consistency and transparency in financial statements, making them easier to understand for investors, banks, and government agencies. In India, the Institute of Chartered Accountants of India (ICAI) issues the Indian Accounting Standards (AS), which help businesses maintain uniformity in financial reporting.

For example, businesses must follow these standards when reporting revenue, expenses, assets, and liabilities. Accounting standards also ensure fair disclosure, so stakeholders are well-informed. They allow businesses to follow a common accounting framework, improving global comparability.

Objectives of Accounting Standards

Accounting standards ensure that financial statements are accurate, transparent, and consistent. They help businesses follow a common framework, making it easier for investors, regulators, and stakeholders to understand financial reports. Below are the main objectives of accounting standards:

Consistency in Financial Reporting: Businesses follow uniform accounting policies, ensuring financial statements remain comparable over time and across companies.
Reliability of Financial Data: Since companies must follow standardized rules, financial reports become more dependable for decision-making.
Transparency for Stakeholders: Clear financial reporting helps investors, banks, and regulators assess a company’s financial health.
Comparability Across Companies: Standardized financial statements allow businesses and investors to compare financial performance within and across industries.
Establishing a Common Accounting Framework: Accounting standards provide a structured approach to recording and reporting transactions, ensuring accuracy and compliance.

Also Read: Beginner’s Guide to Basic Accounting Terms

What are 5 Accounting Standards?

Accounting standards help businesses maintain uniform financial reporting. Different countries and industries follow specific standards to ensure transparency and consistency. Below are five important accounting standards:

1. Generally Accepted Accounting Principles (GAAP)

GAAP is the accounting framework used in the United States. It consists of rules and procedures that companies must follow while preparing financial statements. GAAP ensures that financial reports are reliable, making it easier for investors and regulators to assess business performance.

2. International Financial Reporting Standards (IFRS)

IFRS is a globally accepted set of accounting standards used in over 140 countries. It provides guidelines on financial reporting, ensuring that businesses across different countries follow a common accounting approach.

For example, multinational companies like Apple or Samsung follow IFRS for consistency in their financial statements.

3. Indian Accounting Standards (Ind AS)

Ind AS is India’s version of IFRS, designed to align the country’s accounting practices with global standards. These standards ensure that Indian businesses maintain consistency in financial reporting, making it easier for international investors to analyze their financial statements.

4. Accounting Standard 3 (AS 3) – Cash Flow Statements

AS 3 outlines the preparation and presentation of cash flow statements, helping businesses show their cash inflows and outflows clearly. This standard ensures stakeholders can assess a company’s liquidity and financial health.

For example, a retail company would use AS 3 to report cash from sales and payments to suppliers, aiding investment decisions.

5. Accounting Standard 26 – Intangible Assets

This standard deals with how companies account for intangible assets like patents, copyrights, and trademarks. It ensures that businesses properly recognize and disclose intangible assets in their financial statements.

For instance, a technology company must record the value of its software patents following this standard.

Also Check: What are Accounting Principles?

5 Advantages and Disadvantages of Accounting Standards

Accounting standards have a crucial role in ensuring consistency, transparency, and reliability in financial reporting. While they offer various benefits, they also come with some limitations. Now, let’s explore the advantages and disadvantages of accounting standards:

Advantages of Accounting Standards

Here are the top benefits accounting standards bring to businesses and financial reporting:

1) Improved Transparency: Accounting standards ensure financial reports are clear and understandable. This transparency helps investors, banks, and regulators make informed decisions about a company’s financial health.

2) Consistency Across Firms: These standards provide a uniform approach to preparing financial statements, making it easier to compare companies both locally and internationally. This consistency enhances reliability for stakeholders.

3) Fraud Prevention: By setting clear guidelines, accounting standards make it harder for businesses to manipulate their financial statements or misrepresent their financial position, thus reducing the chances of fraud.

4) Better Decision-Making: Stakeholders can rely on accurate and comparable financial reports to make well-informed decisions, whether it’s for investing or lending money.

5) Assists Auditors: Accounting standards lay out the rules and regulations that auditors follow to ensure the company’s financial statements are true and accurate, helping them ensure the company’s financial health.

Disadvantages of Accounting Standards

Despite their benefits, accounting standards also present a few challenges:

1) Limited Flexibility: Accounting standards can be rigid in some situations, limiting businesses in how they handle certain financial transactions. Different methods of valuation, for example, might be available but choosing the most suitable one can be complex.

2) Difficulty in Choosing Alternatives: Certain accounting treatments offer alternatives, such as how to value inventory. Deciding which method is most appropriate can be challenging, as each method has pros and cons.

3) Restricted Scope: Accounting standards cannot override national laws and must adhere to the legal framework of a country. This restriction can limit the flexibility of these standards in specific cases.

4) Estimation-Based: Some accounting standards rely on estimates, which can introduce uncertainty in financial records. For example, the valuation of assets like goodwill or impairment might be based on subjective assumptions.

5) Monetary Transactions Only: Accounting standards mainly focus on transactions that involve monetary values, meaning non-financial events or values, such as social impact or intellectual property, may not be captured in financial statements.

Indian Accounting Standards by ICAI

The Institute of Chartered Accountants of India (ICAI) has issued various accounting standards (AS) to guide businesses in preparing their financial statements. These standards apply to different levels of enterprises. Accounting standards ensure consistency and clarity in financial reporting.

Here, we’ve mentioned the complete list of Accounting Standards issued by ICAI

AS1: Disclosure of Accounting Policies – Applicable to all levels.
AS2: Valuation of Inventories – Applicable to all levels.
AS3: Cash Flow Statements – Level 1 only.
AS4: Contingencies and Events After the Balance Sheet Date – Applicable to all levels.
AS5: Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies – Applicable to all levels.
AS6: Depreciation Accounting – Withdrawn in FY 2016-17.
AS7: Construction Contracts – Applicable to all levels.
AS8: Accounting for Research and Development – Applicable to all levels.
AS9: Revenue Recognition – Applicable to all levels.
AS10: Accounting for Fixed Assets – Applicable to all levels.
AS11: The Effects of Changes in Foreign Exchange Rates – Applicable to all levels.
AS12: Accounting for Government Grants – Applicable to all levels.
AS13: Accounting for Investments – Applicable to all levels.
AS14: Accounting for Amalgamations – Applicable to all levels.
AS15: Accounting for Retirement Benefits in the Financial Statements of Employers – Applicable to all levels.
AS16: Borrowing Costs – Applicable to all levels.
AS17: Segment Reporting – Level 1 only.
AS18: Related Party Disclosures – Level 1 only.
AS19: Leases – Applicable to all levels.
AS20: Earnings Per Share – Applicable to all levels.
AS21: Consolidated Financial Statements – See note.
AS22: Accounting for Taxes on Income – Applicable to all levels.
AS23: Accounting for Investments in Associates in Consolidated Financial Statements – See note.
AS24: Discontinuing Operations – Level 1, 2.
AS25: Interim Financial Reporting – Applicable to all levels.
AS26: Intangible Assets – Applicable to all levels.
AS27: Financial Reporting of Interests in Joint Ventures – See note.
AS28: Impairment of Assets – Applicable to all levels.
AS29: Provisions, Contingent Liabilities, and Contingent Assets – Applicable to all levels.

Also Read: Accounting Interview Questions and Answers for Freshers

AS 21, AS 23, and AS 27 are required for preparing consolidated financial statements only when a non-corporate entity voluntarily chooses to present them. Consequently, this compilation ensures the consistent application of accounting standards across sectors, enhancing the reliability and comparability of financial reports.

Therefore, accounting standards uphold consistency and reliability in financial reporting. To study them effectively, focus on grasping key principles, review practical examples, and stay updated with any changes to strengthen your understanding.

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Accounting Standards FAQs

What are accounting standards?

Accounting standards are a set of rules and guidelines that companies follow to prepare and present their financial statements. They ensure consistency, transparency, and comparability in financial reporting across organizations.

What are accounting standards in India?

In India, accounting standards are set by the Institute of Chartered Accountants of India (ICAI). These standards guide businesses on how to report financial data and ensure it aligns with national and international reporting norms.

What are 5 common Indian accounting standards?

Five key accounting standards include AS 1 (Disclosure of Accounting Policies), AS 2 (Valuation of Inventories), AS 9 (Revenue Recognition), AS 10 (Accounting for Fixed Assets), and AS 12 (Accounting for Government Grants).

What Is the difference between IFRS and GAAP?

IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) are two major accounting frameworks. IFRS is globally adopted, while GAAP is specific to the United States. Both guide financial reporting but differ in some areas of recognition and measurement.

How do accounting standards benefit financial reporting?

Accounting standards improve the reliability, comparability, and transparency of financial statements, making it easier for stakeholders to analyze and make decisions based on accurate and consistent financial data.

How to learn accounting standards?

You can learn accounting standards through structured online courses like the PW Skills Accounting & Finance Course. The course covers the fundamentals of accounting standards, providing practical insights for effective application.