What is Accounting and Accounting standards?
Accounting standards are a set of accounting principles, standards, and procedures that define the basis of financial accounting policies and practices.
Accounting standard is an accounting term used in accounting world when talking about those set principles. There are 41 accounting standards available.
For this purpose, what is accounting? These will help us understand what accounting standards are in the first place.
Accounting is equally not about recording expenses but is process of management of cash inflows or outflows to control business expenditure and profit.
And also, is a process that includes summarizing, analyzing, and reporting these transactions to oversight agencies, investors, regulatory bodies, and tax collection entities. Some organization keeps a cash flow budget to help in saving money
Furthermore, accounting is the process of keeping or recording financial transactions or financial accounts of any business which will be used for financial reporting. Along with the above, accounting has diverse topics like bookkeeping, commerce, economics, and etc. Indeed, accounting as a profession is versatile and diverse because an accountant needs to have basic knowledge about different industries and the standards to use in preparing or interpreting the financial statement.
Accounting as a subject can be classified into three categories:
• Financial Accounting
• Cost Accounting and,
• Management Accounting
Cost in accounting or cost is the monetary amount spent on expenditures for raw materials, services, equipment, labour and so on. It is the monetary value that is recorded as an expense in bookkeeping.
What Accounting principle is?
So, what is accounting principles? Accounting principles are the rules and procedures that companies must follow when preparing financial data or information. We can’t talk about Accounting standards and principles without taking about accounting.
For example, In the USA, GAAP is the Generally Accepted Accounting Principles of accounting standards widely used when preparing financial statements while International Financial Reporting Standards, IFRS is the international accounting standards used globally.
Accounting standards are just simply the rules and guidelines set up by FASB and IASB governing bodies to keep accounting principles and practices consistent in the accounting system for the users or concerned parties even within the accounting system.
Accounting standards is basically accounting concepts. Now, what is accounting concept? It is the basic rules or standard treatment, assumptions and principles for recording of business transactions and preparing financial statements. The difference between GAAP and IFRS is that GAAP is rules based made for particular circumstances while IFRS is principles based.
There is national regulation for different countries which was adopted using (IFRS) IFRS as the basis. For instance, accounting standards in Nigeria so accounting for regulatory systems are in line with international accounting standards NASB SAS (Nigerian Accounting Standards Board & Statement of accounting standards), IAS and IFRS.
Why do we need accounting standards?
The main objective of the IFRS is to maintain transparency throughout the financial world. This allows businesses and corporate investors to make educated financial decisions, as they are able to see exactly what has been happening with a company in which they wish to invest. That’s how accounting standards came on board. The IFRS foundation provides free access to management accounting PDF and accounting standards PDF of the current year’s consolidated IFRS standards
Accounting standards ensure the financial statements from different companies are comparable, if the entire organisation follows the same principles including those holding accounting jobs; it will make the financial statements credible and uniform as well as consistent. These rules in the case of accounting are the Accounting Standards (AS). They are the framework of rules and regulations for accounting and reporting in a country. Let us see the main objectives of forming these standards.
Does accounting standards matter?
Oh yes! It does, that same reason why we need a set of standards or format to follow for anything. Let us examine the reasons and benefits.
There are various reasons for setting accounting standards such as the International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS) is to achieve comparability and consistency with financial statements.
• Disclosure requirements: a company have the responsibility to present its financial statement and other documents required to the owners of the company called shareholders with additional notes for easy understanding.
• To increase certainty: for accountants holding the accounting job, there is need for confidence; this can be achieved if one follow the set standard which will eliminate confusion.
• For comparison: for interested parties even job applicants or investors, you can only compare like for like. An investor needs to know how and what their investment are yielding or return on investment (ROI) as well as compare it to competitors in the same industry.
Is just accounting standard can allow you to achieve this, assuming there were no standards, comparison wouldn’t happened or difficult because anyone company can use any basis to access its own company such as different accounting treatments which won’t be understandable but only by the preparer and it will aid in fictitious disclosure without knowing the true position of the organisation in the market. In fact, how can stock be valued?
• One other aim is to improve the reliability of financial statements. In the global financial industry, where companies invest across countries is becoming common using currency different from the home country using standards will aid in transaction and translations.
It is very essential for the analysts, auditors and investors in the industry so they can depend on financial reports for its accuracy and consistency. Reliability of valuations and valuation methods such as inventory, assets, deprecation used in financial statement.
Accounting treatment should be reported in the same manner to avoid confusion among users. The treatment of the valuation of fixed assets which involves huge component of a business asset or value for comparable basis, those assets that are considered inventory should be recorded at the lower of cost or net realisable value including conversion cost that is international Accounting Standards 2 while Non-current Assets Held for Sale and Discontinued Operations must follow the IFRS 5.
In accounting standards list IAS 4 now replaced with IAS 36(fully withdrawn and supersede by IAS 36) is depreciation accounting that are there to guide those in accounting jobs on treatment of depreciation. Accountants use reducing method or declining for depreciation just as loan.
For example, let’s look at how is depreciation calculated under GAAP or IFRS, Now, the depreciation in accounting using IFRS requires component depreciation depending on the type of assets when patterns of economic benefits differ from the main asset, while GAAP component that is depreciated is permitted but not required so is not mandatory but it is a depreciation method of choice.
There are some major differences between the GAAP rules codified in ASC Topic 360 and the IFRS rules in IAS 16, which is accounting for Property, Plant and Equipment: GAAP requires that fixed assets be stated at their cost, net of any accumulated depreciation. IFRS allows fixed assets on revaluation.
If you are using IFRS for the first time, you must follow IFRS 1, IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the processes that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its financial statements.
Yes, in preparing financial statement, one has to follow IAS 1 to know the information that has to be disclosed in the financial statement. With all that is mentioned in here, it shows the need why accounting standards matters.