ADVANCED

ACCOUNTING
5th semester
TOPIC :

ACCOUNTING STANDARDS
OBJECTIVES & IMPORTANCE

Dr. J. VIJAY KUMAR

Lecturer in commerce
 ACCOUNTING STANDARDS
CONCEPT OF ACCOUNTING STANDARDS:
We know that Generally Accepted Accounting Principles
(GAAP) aims at bringing uniformity and comparability in
the financial statements. It can be seen that at many
places, GAAP permits a variety of alternative accounting
treatments for the same item. For example, different
methods for valuation of stock give different results in
financial statements.
Such practices sometimes can misguide intended users in
taking decision relating to their field. Keeping in view the
problems faced by many users of accounting, a need for
the development of common accounting standards was
aroused.
MEANING OF ACCOUNTING STANDARDS:
Accounting standards are the written
statements consisting of rules and guidelines,
issued by the accounting institutions, for the
preparation of uniform and consistent financial
statements and also for other disclosures
affecting the different users of accounting
information.
Accounting standards lay down the terms and
conditions of accounting policies and practices
by way of codes, guidelines and adjustments
for making the interpretation of the items
appearing in the financial statements easy and
even their treatment in the books of account.
NATURE OF ACCOUNTING STANDARDS:
On the basis of forgoing discussion we can say
that accounting standards are guide, dictator,
service provider and harmonizer in the field of
accounting process.
(i) Serve as a guide to the accountants:
Accounting standards serve the accountants as
a guide in the accounting process. They
provide basis on which accounts are prepared.
For example, they provide the method of
valuation of inventories.
(iii) Serve as a service provider:
Accounting standards comprise the scope of
accounting by defining certain terms,
presenting the accounting issues, specifying
standards, explaining numerous disclosures
and implementation date. Thus, accounting
standards are descriptive in nature and serve as
a service provider.
(ii) Act as a dictator:
Accounting standards act as a dictator in the
field of accounting. Like a dictator, in some
areas accountants have no choice of their own
but to opt for practices other than those stated
in the accounting standards. For example, Cash
Flow Statement should be prepared in the
format prescribed by accounting standard.
(iv) Act as a harmonizer:
Accounting standards are not biased and bring
uniformity in accounting methods. They remove
the effect of diverse accounting practices and
policies. On many occasions, accounting
standards develop and provide solutions to
specific accounting issues. It is thus clear that
whenever there is any conflict on accounting
issues, accounting standards act as harmonizer
and facilitate solutions for accountants.
OBJECTIVES OF ACCOUNTING STANDARDS:
In earlier days, accounting was just used for
recording business transactions of financial
nature. Its main emphasis now lies on
providing accounting information in the
process of decision making.
 NEED OF ACCOUNTING STANDARDS
(i) For bringing uniformity in accounting
methods:
Accounting standards are required to bring uniformity in
accounting methods by proposing standard treatments
to the accounting issue. For example, AS-6(Revised)
states the methods for depreciation accounting.
(ii) For improving the reliability of the financial
statements:
Accounting is a language of business. There are many users
of the information provided by accountants who take
various decisions relating to their field just on the basis of
information contained in financial statements.
In this connection, it is necessary that the
financial statements should show true and fair
view of the business concern. Accounting
standards when used give a sense of faith and
reliability to various users. They also help the
potential users of the information contained in
the financial statements by disclosure norms
which make it easy even for a layman to
interpret the data.
Accounting standards provide a concrete
theory base to the process of accounting.
They provide uniformity in accounting which
makes the financial statements of different
business units, for different years comparable
and again facilitate decision making.
(iii) Simplify the accounting information:
Accounting standards prevent the users from
reaching any misleading conclusions and make
the financial data simpler for everyone.
For example, AS-3 (Revised) clearly classifies
the flows of cash in terms of ‘operating
activities’, ‘investing activities’ and ‘financing
activities’.
(iv) Prevents frauds and
manipulations:
Accounting standards prevent manipulation of
data by the management and others. By
codifying the accounting methods, frauds and
manipulations can be minimized.
 (v) Helps auditors:
Accounting standards lay down the terms and
conditions for accounting policies and
practices by way of codes, guidelines and
adjustments for making and interpreting the
items appearing in the financial statements.
Thus, these terms, policies and guidelines etc.
become the basis for auditing the books of
accounts.
 IMPORTANCE OF ACCOUNTING
STANDARDS
Accounting Standards plays a very efficient
role in the whole accounting system. Some of
its important roles are discussed below:
Brings Uniformity in Accounting System
Accounting Standards are the one that helps in
bringing the uniformity in whole accounting. It
is one important advantage of accounting
standards.
Accounting standards sets the same rules &
regulations for the treatment of accounting
transactions.
It means that all companies record the
transactions in the same manner. For example,
Accounting Standard-6 governs the whole
depreciation accounting. All companies will be
following AS-6 for matters concerned with
depreciation. This way it brings uniformity in
whole accounting procedure.
Easy Comparability of Financial Statements
Accounting standards has made it simplified the
comparison of different financial statements.
Financial statements of two companies can be easily
compared. If two companies are following different
accounting system & format, comparison between
them becomes quite difficult.
Like if one company follows LIFO method of stock
accounting while others follows FIFO method.
Here comparison becomes difficult as two are
following different methods. Accounting
standards helps in overcoming this problem.
Assists Auditors
Accounting standards helps the auditors in
performing their duties. It simplifies their task &
makes it easy for them to perform their roles.
Accounting Standards have established different
standards, rules & regulations to be followed by
companies in their accounting system.
 These rules & regulations are mandatory to be
followed by every company. It governs the whole
manner of preparing & presenting financial
standards. So if auditor assures that company has
followed accounting standards, he can easily
verify that all financial standards are fair & true.
Makes Accounting Informative Easy &
Simple
Simplifying the whole accounting information is
important advantage of accounting standards.
It provides standard rules for each & every
accounting transaction. It removes all
complexity in the accounting process.
Standard & uniform process is followed. It
helps the users in easy understanding & avoids
any misleads from it. For example, AS-3
clearly shows the rules regarding flow of cash
under 3 main heads. These 3 heads are
operating activities, investing activities &
financial activities.
Avoids Frauds & Manipulations
Accounting standards plays an efficient role in
preventing frauds in the accounting system.
Frauds & any accounting data manipulation may
adversely affects the organisation.
Accounting standards establishes different
accounting rules & principles. These accounting
principles govern the whole accounting
procedure. These principles are not optional to be
followed but are mandatory to be followed.
It becomes almost impossible to misrepresent &
manipulate any financial data on part of
management. Committing any fraud also become
harder for them.
Provides Reliability to Financial
Statements
Financial statements are important source of
acquiring information regarding companies.
Investors & different stakeholders depends on
these statements for getting information. These
people take important decisions on the basis of
this data only.
It is thus very important that these financial
statements are true & fair. Accounting
standards fully governs these financial
statements. It is ensured by accounting
standards that these statements are real &
trustworthy.
Measures Management Performance
Accounting standards make it easy in
determining accountability of management.
It makes it easy to measure the performance
of management team & provide any
suggestions.
It helps in analyzing management ability in
maintaining solvency of the firm, increasing
the company’s profit & various other
important roles. It directs the management to
adopt a particular accounting policy. Same
policy should be followed constantly to avoid
any confusion.
THANK YOU