Question

Write a benefits of accounting standards.

Answer 1

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(I)Accounting Standards improve the reliability and credibility of Financial Statements: There are numerous parties which are interested in the accounting information of an enterprise. They include the investors, management, creditors, employees, Government Officials, researchers etc. It is therefore necessary that the financial statements present a true and fair view of the financial position and operating results of an enterprise. Accounting standards generate confidence among the users of the accounting information by providing a definite structure of uniform guidelines which enhance the reliability and credibility of the accounting information.

(ii) Accounting Standards ensure the consistency and comparability of Financial Statements: Accounting standards make the financial statements of different enterprises or of the same enterprise for different accounting periods comparable. They bring the uniformity of assumptions, rules and policies adopted in the preparation of financial statements and thus they ensure the consistency and comparability of such statements which in turn ensures better comparison of profitability, financial position and future prospects of an enterprise. In the absence of accounting standards, comparison of different financial statements may lead to wrong conclusions because each enterprise would evolve its own rules or standards to suit its purpose.

(ii) Accounting Standards help in resolving conflict of financial interests among various groups: Sometimes, there is a conflict of financial interests among the various groups interested in financial statements. For example, shareholders and creditors may have opposite interests in assessing the profitability and net worth of an enterprise. Accounting standards are helpful in resolving such a conflict because financial statements drawn up on the basis of accounting standards will be accepted to all the groups,

(iv) Accounting Standards significantly reduce the chances of manipulations and frauds: Adoption of accounting standards in the preparation of financial statements has reduced the chances of manipulations, frauds, insufficient disclosures or the use of inappropriate accounting policies.

(v) Helpful to Auditors: It is the duty of the auditors to ensure that the accounting standards have been followed in the preparation of financial statements. In case of deviations, it is also their duty to make adequate disclosure in their reports so that the users of such statements may be aware of such deviations. As a result, the auditors will be free from court cases and various penal provisions under the company law in cases of inducted frauds, insufficient disclosures or due to adoption of inappropriate accounting policies.