Explain Accounting Standards

Accounting Standards :

Accounting communicates the financial results of business to various parties by means of financial statements which have to exhibit a “true and fair” view of the state of affairs. Like any other language, accounting also has complex set of rules. However, these rules have to be used with a reasonable degree of flexibility in response to specific circumstances of the business and also in line with the changes in the economic environment, social needs, legal requirement and technological developments. Thus, these rules, though not rigid, cannot be applied arbitrarily. They normally operate within the boundary of rationality.

Accounting standards are defined as the policy documents issued by a recognized expert accounting body relating to various aspects of measurement, treatment and disclosure of accounting transactions and events. InIndia, accounting standards are prepared by the Accounting Standard Board constituted by the Institute of Chartered Accountants of India.

The summary of various accounting standards is as follows :

The Accounting Standards seek to describe the accounting the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in companies’ economic performance. The setting of accounting standards has the following advantages :

•      Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements.
•      There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.
•      The application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country. However, it should be noted in this respect that differences in the institutions, traditions and legal systems from one country to another give rise to differences in accounting standards practised in different countries.

However, there are some disadvantages of setting of accounting standards :

•      Alternative solutions to certain accounting problems may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become difficult.
•      There may be a trend towards rigidity and away from flexibility in applying the accounting standards.
•      Accounting standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes.