Accounting Standards

Introduction

Accounting standards are the rules, regulations, and guidelines that govern the recording, measurement, and reporting of the financial activities of a business. They are designed to ensure consistency in the accounting of a companys financial transactions, so that an analyst or investor can make an informed decision based on accurate and verifiable data. Accounting standards are usually established by regulatory bodies such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).

Accounting Standards

Accounting standards are used to develop a uniform code of practice and procedures to be used in the preparation and presentation of financial statements, and to maintain the integrity of financial reports. This ensures that an investor can make a more accurate assessment of a companys financial and operating performance. The two primary accounting standards are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). GAAP is the set of rules formulated by the FASB for the preparation of financial statements in the United States and is based on the rules of the American Institute of Certified Public Accountants (AICPA). IFRS is the set of international standards adopted by the IASB.

GAAP and IFRS are comparable in certain areas, but there are some topics for which one set of standards may provide more insight than the other. For instance, GAAP has many rules and regulations that must be followed when it comes to the recording and reporting of a companys assets and liabilities; by comparison, IFRS has relatively few accounting rules and fewer standards when it comes to the valuation of assets and liabilities.

Importance of Accounting Standards

Accounting standards are essential to the maintenance of fair and accurate financial reporting which is essential to the public trust. Without accounting standards, there would be no consistency or reliability in the reporting of corporate financial activities. Several financial scandals have highlighted the need for proper accounting standards and the importance of having reliable financial information. Investors rely on financial statements to make decisions about whether to invest in a company and the financial statements must be accurate for them to make a reliable decision.

Furthermore, accounting standards ensure the efficiency of financial reporting, as the standards provide a set of procedures to follow when preparing the financial statements. This minimizes the risk of errors that might arise due to discrepancies in the manner in which different companies carry out their accounting.

Conclusion

In conclusion, accounting standards are essential for the creation of reliable and consistent financial information. Without accounting standards, the public could not trust the financial information presented, and investors would have no way to make sound decisions. Companies must adhere to these standards in order to ensure the accuracy of their financial statements and protect their financial health.

Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP), developed by the Financial Accounting Standards Board (FASB), are the cornerstone of financial accounting and reporting in the United States. GAAP specify how companies must prepare their financial statements and which types of transactions should be reported. Adherence to GAAP ensures that a companys financial statements are consistent, transparent and verifiable.

GAAP prescribe specific rules and formulas to be used in accounting and reporting. The GAAP framework requires companies to report information in a structured, regulated way that allows its customers to understand the data being reported accurately and comprehensively. For example, GAAP requires that companies report revenues when earned, and expenses when incurred.

GAAP include principles, conventions and rules which generally govern the preparation of financial statements. They include principles such as accuracy, cost measurability, completeness, reliability, timeliness, conservatism and disclosure. These are the underlying framework that provides a structure to the preparation of financial statements, and help define what accounts should be reported and how they should be reported.

GAAP have been developed over many years, and have become generally accepted as the authoritative way for reporting financial information. The basic premise behind GAAP is that a companys financial statements must be measured in an objective and consistent manner, and should be based upon the actual transactions that have occurred. Financial statements must therefore be prepared in accordance with GAAP, and auditors are expected to verify that this is done.

Companies which do not follow GAAP can give an unfair impression of their financial condition, which can be misleading to stakeholders including investors and creditors. Therefore, it is important that companies comply with GAAP in order to give a true picture of their financial position.