Accounting Standards in India, an Introduction – IPCC Group 1 (Paper 1)

Accounting Standards in short known as “ASs” are the Written Policy Documents issued by

1. Expert Accounting Body(or),
2. Government(or),
3. Other Regulator Body

And these Standards cover the aspects of recognition, measurement, presentation and disclosure of Accounting Transactions.

The ostensible (clear) purpose of the Accounting Standards, set up by the Standards Setting Bodies, is to disseminate the rational financial information of the enterprises to the Investors, Stakeholder and outside people.

Accounting Standards purely deals with the

1. Recognition of Transaction and Events of the Economic Activities
2. Measurement of the recognized elements of the Financial Transactions.
3. Presentation of the Information through Financial Statements in a Systematic way to the readers (Accounting Experts) of the Financial Statements apparently.
4. Disclosure of the Financial Statement in general statements to enable the Investors and Management to take prudent and quick business decisions.

ASs standardize the diverse accounting policies of an enterprise

1. To eliminate the incomparability of the Financial Statements of the different Enterprises for a specific period, or the Financial Statements of the same enterprise over a number of years.
2. To provide the Valuation Norms and Disclosure Requirements.

Standards Setting should achieve

Credibility

One must disclose the Accounting Standards adopted to prepare the Financial Statement of an enterprise. Those standards must be applicable and acceptable in all the areas i.e. inventory, depreciation valuation. These standards are to be disclosed, hence the investors will trust the Financial Information prepared based on the Standards as they are open to them.

Comparability

Standardization of Accounting Standards will enable the user of Financial Data to make comparison of one enterprise over years as well as to make a comparison between the enterprises to trace out the profitability of the enterprises. Therefore investor will decide whether to invest or not.

When comparing a company’s Financial Statements with past years then it is termed as Intra-Enterprise Comparison where as if the comparison is done between the companies over a specific Financial Year then it is known as Inter-Enterprise Comparison.

In both the cases Accounting Standards followed by the comparable enterprises in drawing up the Financial Statements should be similar.

Creative Accounting

Creative Accounting means molding the Accounting Policies to produce the Financial Statement in favour of a specific group. By Standardizing the Accounting Policies we can reduce the scope of making such illicit activities.

The main aim of the ASs is to improve the quality of the financial reports; thereby there will be constant, transparent and comparability of the Financial Data for the extent of the user of the Financial Statement. By keeping good Financial Reporting a company can gain the capital at low cost as the investors feel low risk to invest in the company.