What Are The Advantages Of Accounting Standards?

A set of standards for maintaining accounts for a company or individual are commonly known as accounting standards. It helps to clarify the reports concerning financial transactions. There are a total of 32 accounting standards to date that companies need to follow to maintain their accounts and financial statements.

All companies mandatorily need to follow this set of common procedures while maintaining their accounts. Accounting Standards help everyone with a common terminology or nomenclature and understanding the accounts and financial statements become easier for every stakeholder.

Let’s dive in further to understand the various advantages of accounting standards.

1. Uniformed Accounting

With accounting standards, you need to maintain accounts as per the rules and guidelines. It provides a standard format for recording transactions and financial statements. It eventually leads to having a common terminology for all the elements required for account writing or transactions.

Thus, it helps to have a uniform accounting format and makes it understandable for all the stakeholders involved.

2. Prevention of Accounting Cover-ups and Frauds

All entities are bound by the accounting regulations and procedures laid down by Accounting Standards. It results in the prevention of accounting cover-up of financial data. Every other entity has to follow these standards mandatorily.

Hence, it poses a challenge for anyone to fake any financial information and makes it difficult to commit fraud. Ultimately, transparent and factual information helps the management to take the appropriate action, benefitting the organisation in the long run.

3. Improves Reliability of Financial Statements

A typical company comprises several stakeholders that derive information from the financial statements they have with them. It helps them to take appropriate decisions based on the data from these statements. In addition, some stakeholders may also think of investing in a company based on the data they interpret from the financial statements.

An organisation big or small should always stick to providing real information to its stakeholders, and that’s what Accounting Standard helps to do.

Therefore, it’s vital to present a factual picture of the financial status of a company. Accounting Standards ensure the statements are true and trustworthy and all data stand on facts and are therefore reliable.

4. Comparison of financial performance

Due to accounting standards, it is easy for all stakeholders to follow the standardized financial account and compare it with others. It helps to analyse the financial performance of several companies before they take any decision.

In addition, you can compare statements of your company of different years to analyse and identify the growth status of your company, which you can present to your associates too.

Comparing statements from different times or organisations helps anyone to analyse the drawbacks or flaws within themselves, allowing them to introspect on the SWAT analysis and develop shortly in the upcoming days.

5. Helps Auditors’

Policies set by accounting standards require the account statements to be written in a particular standard format. It helps the auditors to skip the cumbersome process of checking the account statements during audits, as the format is as per the standards.

Auditors are already burdened with lots of responsibilities, so Accounting Standards exist as a boon for them, as everything is maintained in a uniform format, across all organisations. It helps them to process the auditing efficiently.

6. Defining Organisational Responsibility

The accounting standards help to measure the KPI of the management of any organisation. It helps to gauge the management’s capability to increase profits, maintain liquidity of the organisation and various other vital financial responsibilities of the management.

The management must choose policies related to accounting. Frequent changes in the policies may lead to chaos for the stakeholders. In addition, there’s a probability of losing consistency and comparability if standards aren’t set.

Governing body

The Ministry of Corporate Affairs notifies the Accounting Standards to meet with International Financial Reporting Standards (IFRS). The Accounting Standards Board of Institute of Chartered Accountants of India formulates these standards.

Therefore 2 sets of accounting standards have been set for India, which are Ind AS and AS. The difference between Ind AS and AS is that Ind AS is the new set of accounting standards that converges with the IFRS accounting standards, while AS follows the existing accounting standards complying with Companies Rules, 2006.

Both Ind AS and AS follow the same pattern of naming and numbering.

Conclusion

Maintaining accounts is a complex process and prone to errors. Unless and until a company doesn’t have a clear picture of their financial status, they fail to take the appropriate decision, leading to huge losses.

The Accounting Standards help to maintain accounts and financial statements in a uniform way, and prevent misrepresentation of data, giving a clear and transparent idea of the existing situation.

It helps the management to take the right decision or appropriate steps. It also helps the stakeholders aspiring to invest in a concerned company. Accounting Standards also help the auditors by eliminating most of the cumbersome tasks.