Accounting Standards: Everything You Need to Know!

In this fast-paced world, where numbers, accuracy, and transparency become the cornerstone of reliability in financial reporting. But how can businesses, irrespective of their size and type, depict the same financial language? Here’s where accounting standards- the universal guide for the financial journey come into play. These standards ensure consistency, comparability, and justice to the financial statements. 

Have you ever given a thought to how global giants like Apple and SMEs in your locality align their financial practices? Why do investors rely on balance sheets and income statements? A lot more questions flooding your mind? Keep scrolling down to see how accounting principles are reshaping businesses globally. 

What Are Accounting Standards and Principles?

Accounting standards and principles are the authoritative rules for financial reporting that ensure consistency and transparency across the business world. They are referred to as the primary source of generally accepted accounting principles (GAAP) that describe how transactions are recognized, measured, and accessed in the financial statements. 

Financial accounting standards act like a GPS for businesses, guiding them to present their financial records accurately irrespective of their size and type. They not only encourage investors to ensure compliance but also assist in making smarter business decisions. 

Importance of Accounting Standards for Businesses

1. It builds investor’s trust through transparent and standardized financial reports. 
2. It simplifies compliance for businesses, reducing the risk of penalties. 
3. For businesses witnessing international markets, accounting standards IFRS help them speak the common financial language. 

What are the Benefits of Accounting Standards for Businesses? 

1. Consistency Across Financial Reporting: 

• It has standard rules that ensure consistency across financial statements. 
• This helps businesses in achieving uniformity for financial reporting. 

2. Enhances Reliability of Financial Statements: 

• Most stakeholders depend on financial statements for details. Investors leverage these financial receipts to make strategic decisions. 
• Accounting standards and principles give a sense of credibility to the financial statements, fostering investors to rely on them. 

3. Prevents Accounting Manipulations: 

• The standard accounting practices lay down a foundation to the methodologies that all businesses should follow. 
• The primary benefit of these principles is that they prevent the manipulation of financial data. 
• It is crucial for everyone to follow these accounting principles, as it forbids even the management from falsifying the data. 

4. Assistance to the Auditors

• Financial reporting and accounting standards define accounting policies, rules, and regulations in a written document. 
• So, it becomes easier for the auditor to go through these rules and make sure if the businesses are accurately following all the accounting practices. 
• It also validates if the financial statements submitted by the management are true and fair. 

5. Comparability 

• Since all the entities follow the same accounting standards, their financial statements or records can be compared. 
• The users leveraging the financial statements can compare the records of multiple business entities before making decisions. 
• Also, these global accounting standards help management compare financial statements from different years. 
• This assists in defining the growth curve. 

Read More: Role of Cash Receipts in Accounting

What are the Types of Accounting Standards? 

The Accounting Standards Board has issued two types of accounting principles: GAAP and IFRS. Let’s scroll down to see in detail: 

1. Generally Accepted Accounting Principles 

• Generally Accepted Accounting Principles i.e. GAAP is outlined as a set of financial reporting standards heavily leveraged across the United States. 
• These principles are developed and maintained by the Financial Accounting Standard Board (FASB). 
• It defines the complete roadmap for a company to record and report its financial statements or transactions. 
• Entities listed in the U.S. Security Exchanges should comply with these principles, as public and private companies heavily leverage them. 

2. International Financial Reporting Standards 

• International Financial Reporting Standards i.e. IFRS are a series of global accounting principles developed by the International Accounting Standards Board (IASB). 
• Multinational companies and a wide array of countries outside United States use these standards to ensure transparency. 
• IFRS aims to establish uniformity in the accounting language, practices, and financial statements. 
• It ensures that the financial records across international boundaries can be compared. 

GAAP Vs IFRS: What is the Difference?

Category	GAAP	IFRS
Definition	It is a rule-based framework that integrates consistency and compliance in U.S. Markets.	It is a principle-based accounting standard to establish transparency and comparability across countries outside U.S.
Which Board Established these accounting Principles	Financial Accounting Standards Board Or FASB defines these rules	International Accounting Standards Board Or IASB outlines these principles
Global Usage	Accepted by the United States and entities listed in the U.S. Stock Exchanges.	Accepted by 140 countries outside the U.S that includes Europe, Africa, as well as Asia.
Asset Valuation	Records fixed assets at historical costs with no revaluation allowed.	Allows revaluation of assets to a fair value, ensuring a more current valuation.
Impairment and Reversal Losses	Here, Impairment losses cannot be reversed and are permanent.	It allows the reversal of impairment losses if asset values are recovered.

Wrap Up 

As we approach the end of the blog, hopefully, you have understood that accounting standards are the cornerstones of financial clarity and trust. They ensure transparency and comparability and empower businesses with smarter decision-making. GAAP and IFRS have transformed the way organizations communicate their financial health.

If you have queries, shoot them below! Try to look for accounting software that matches all accounting standards. Here’s Munim for You! Sign up now and leverage unlimited benefits right away! 

FAQs

1. Who Sets Accounting Standards? 

The Financial Accounting Standards Board, which is a non-profit organization, establishes these principles for accurate financial reporting. 

2. How to comply with IFRS Codes? 

To comply with IFRS codes, businesses should maintain accurate record-keeping, provide transparent statements, and align with IFRS principles. 

3. Who uses accounting standards? 

Companies, non-profit entities, governments, and other organizations leverage financial accounting standards. 

4. What is ICAI? 

ICAI refers to the Institute of Chartered Accountants of India, which is responsible for formulating and recommending accounting standards in India.