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Accounting Standards and International Financial Reporting Standards (IFRS)

Accounting Standards- Introduction, Purpose and Importance


After going through this lesson, you shall be able to understand the following concepts.

• Meaning of Accounting Standards
• Nature & Scope of Accounting Standards
• Uses of Accounting Standards
• Limitations of Accounting Standards
• Accounting Standards Issued by The Institute of Chartered Accountants of India (ICAI)     

Meaning of Accounting Standards
The main objective of preparation of financial statements is to summarise the financial position of a business enterprise for an accounting period in monetary terms. In order to compare the financial position of an enterprise with that of another enterprises, there needs to be a consistency in the method of preparation of financial statements across various companies. In order to make these methods and principles uniform and consistent across organisations the accounting standards have evolved.

Accounting Standards are the statements of code of practice from the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements. In layman terms, accounting standards are the written documents issued by the expert institutes (ICAI) or other regulatory bodies covering various aspects of measurement, treatment, presentation and disclosure of accounting transactions.

According to Kohler, “A code of conduct imposed on an accountant by customs, law and professional bodies

Nature & Scope of Accounting Standards
The below mentioned are the basic points explaining the nature of accounting standards.

1. Accounting standards are a set of guidelines that help in the preparation of reliable financial statements.

2. Accounting standards help in bringing a standardisation of presentation and help in removal of variations that exist in treatment of accounting information.

3. Accounting standards depend on the environment and legal structure of the country in which the business operates. Due to constant changes in the environment of our country, the accounting standards are updated by the ICAI from time to time. In case of dispute between the Law of Land and Accounting Standards, the law will prevail.

4. It is compulsory for various companies to adopt accounting standards.

5. Accounting standards are flexible, as alternate presentations and practices are acceptable and an enterprise is free to adopt any method as long as it follows it consistently. In case the accounting practices are changed, the change must be quantified and disclosed in the financial statements.

Need for Accounting Standards
Accounting Standards are required to ensure the compliance of following information with the qualitative characteristics of accounting:

  1. Profit or Loss of the business enterprise
  2. Financial Position of the business enterprise
  3. Inflow and outflow of Cash

All the above information must comply with the qualitative characteristics of accounting i.e. Reliability; Relevance; Understandability; and Comparability. Accounting Standards also assures its various users about the truth and fairness of the information contained in the Financial Statements of the business enterprise. These standards maintain uniformity in the process of accounting records as well as it assists in the comparison of books of accounts of different business enterprises.

Uses of Accounting Standards
Accounting standards serve the following purposes.

1. They provide a standardised format which is to be followed while preparation of accounts, minimising the variations in the method of preparation of accounts.

2. Accounting standards provide the basic rules on the basis of which financial statements are prepared.

3. They make it compulsory for the companies to make a disclosure of the accounting policies followed while preparation of financial statements.

4. When a company complies with the accounting standards while preparation of financial statements it creates a sense of confidence among the users of financial statements.

5. They help the auditors in auditing the books of accounts as consistent use of same accounting policies helps an auditor in forming an opinion about the financial statements.

Objectives of Accounting Standards
  1. We establish standards so that we can compare our performance with something which is uniform for all. For example: Our marks are expressed in percentage which is a common unit of measurement for all so that the students can compare their performance with other stud…

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