Accounting standards, also known as Generally Accepted Accounting Principles (GAAP), are a set of guidelines and rules that define the acceptable accounting practices and methods for preparing financial statements.
• These standards ensure consistency, comparability, transparency, and reliability in financial reporting.
• They are crucial for facilitating meaningful communication of financial information and promoting confidence among users of financial statements.
Nature of Accounting Standards:
The nature of accounting standards reflects the principles and characteristics that guide the preparation and presentation of financial statements.
Here are key aspects of the nature of accounting standards:
Guide for accounting:
Accounting standards serve as a comprehensive guide for the accounting profession. They provide principles, rules, and guidelines for the recognition, measurement, presentation, and disclosure of financial information.
Mandatory to follow:
Accounting standards are mandatory for companies that are required to comply with them. Regulatory authorities and standard-setting bodies mandate the adoption and application of accounting standards to ensure consistency and comparability in financial reporting.
Framed according to law:
Accounting standards are often framed and established according to legal frameworks and regulations. They are prepared accordance with the prevailing laws of the country.
Serves as a harmonizer:
Accounting standards bring uniformity in accounting system. They set the accounting guidelines and standards for every business and they are required to prepare and present financial statements accordingly.
Flexible in nature:
Accounting standards are flexible in nature. These do not insist companies to follow their standards in every matter. In many cases, companies are free to adopt any method when the option of different accounting practices is available,
Need & Significance of Accounting Standards:
The need and significance of accounting standards are crucial in ensuring consistency, transparency, and reliability in financial reporting.
The need and significance of accounting standards are discussed below:
Uniformity in accounting:
The need for uniformity in accounting practices is critical for consistency and comparability. Accounting standards establish a standardized framework that ensures entities follow consistent methods for recording, measuring, and presenting financial transactions.
Improves reliability of financial statements:
The reliability of financial statements is paramount for decision-making by investors, creditors, and other stakeholders. Accounting standards contribute significantly to the improvement of financial statement reliability.
Prevents frauds and manipulations:
A crucial aspect of accounting standards is their role in preventing frauds and manipulations in financial reporting. Without standardized rules, entities might be tempted to engage in creative accounting practices to present a more favorable financial picture than the reality. Accounting standards set boundaries and prescribe ethical practices, acting as a deterrent against fraudulent activities.
Comparability:
Comparability is a key need in financial reporting, allowing users to make meaningful comparisons between different entities and across various reporting periods. Accounting standards play a pivotal role in ensuring comparability by establishing consistent methods of measurement and presentation.
