Question

What is the nature and objective of accounting standards?

Answer 1

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Nature of Accounting Standards:

1. Accounting standards laid down the norms of accounting policies and practices by the way of courts to direct as to how the transactions and events should be dealt with in accounts and disclosed in the financial statements. For example accounting standard may define the term cost and lay down a definite method for valuation of inventory is with minded modifications and a special circumstances.
2. In this way they remove the effect of diverse accounting practices and policies so that financial statements of different business units become comparable.
3. They prescribe a preferred accounting treatment from the available set of methods for solving one or more accounting problems.
4. They provide information to the users of financial statements as to the basis on which such statement has been prepared
5. They limitlimit the area within which accountant has to function and in this respect they are just like laws. However,accounting standards to not aim to introduce rigidity in the account they only attempt to limit the flexibility and provide the accountants realistic guidelines. If the specific circumstances of an enterprise do not justify the application of a certain accounting standard the alternative practice regarded as most suitable may be adopted.

Objectives of Accounting Standards:

1. to ensure uniformity in the preparation and presentation of financial statements.
2. to provide information to the users about the policies adopted in the preparation of financial statements.
3. to remove the effect of diverse accounting policies and practices.
4. to ensure consistency transparency and comparability of financial statements.
5. to improve the real vinati and credibility of financial statements.