Accounting standards build a strong financial system. They bring uniformity and trust in financial reporting. The types of accounting standards play a significant role in guiding businesses to prepare their financial statements correctly. Accounting standards include rules and principles that tell companies how to record income, expenses, assets, and liabilities. They help show the proper financial health of a business. Accounting standards are essential because they improve transparency, build investor trust, and maintain consistency across organisations. They also help companies follow legal and financial rules properly.
What are Accounting Standards?
Accounting standards are written rules that guide how companies prepare and present their financial statements. These regulations provide that financial information is consistent, accurate, and transparent. Accounting standards represent a common language that companies use when reporting the state of their finances. Accounting standards allow investors, regulators, and other parties to make sound decisions based on good data.
History of Accounting Standards
The history of accounting standards goes back to the beginning of the 20th century. Following the stock market crash of 1929, the demand for transparency in financial reporting increased. The Securities and Exchange Commission (SEC) was established in 1934 to oversee financial disclosures within the United States. Later, the Financial Accounting Standards Board (FASB) was established in 1973 to develop formal accounting standards known as GAAP.
Internationally, the need for global accounting standards led to the International Accounting Standards Committee (IASC) in 1973. The IASC issued International Accounting Standards (IAS) to promote consistency in financial reporting across countries. In 2001, the International Accounting Standards Board (IASB) replaced IASC and introduced International Financial Reporting Standards (IFRS).
In India, the Institute of Chartered Accountants of India (ICAI) started issuing accounting standards in 1977. India gradually converged with global practices by adopting Indian Accounting Standards (Ind AS) based on IFRS, which were adapted to Indian conditions. The evolution of accounting standards around the globe has significantly improved the quality, transparency, and comparability of financial reporting.
Different Categories of Accounting Standards
Understanding the types of accounting standards is important because they form the base of financial statements. Companies, investors, and governments depend on these rules for precise and accurate financial data. Accounting standards guide how businesses record transactions, report profits, and measure assets.
Basic Accounting Standards
Basic accounting standards focus on daily business activities. These standards guide companies on how to record sales, expenses, and small asset purchases. They make sure that every transaction is recorded correctly and nothing is missed. Basic standards help in building a strong base for complex accounting.
Financial Accounting Standards
Financial accounting standards govern the way companies prepare their financial reports. These standards guide recording larger transactions like loans, investments, and long-term assets. Companies use financial accounting standards to prepare balance sheets, profit and loss accounts, and cash flow statements.
Historical Cost Accounting
Asset valuation on historical cost accounting works as the asset’s original purchase price or liability. This does not consider the current market value that it would portray. Subsequently, this method keeps financial records easy to understand and verifiable. However, the current actual value of assets may not be reflected.
Fair Value Accounting
Fair value accounting records the current market value of the assets and liabilities. A more accurate depiction of the company’s financial position under this model provides a clear understanding of the real worth of assets and debts to any investor.
Accrual Accounting
Accrual accounting records revenue spent and the incurred time, not cash received or paid. His income is matched by the expenses that gave rise to it. Therefore, it better represents the actual financial condition of a business.
Cash Accounting
Cash accounting is the accounting method of recording a transaction when cash is received or paid. This method is quite applicable and straightforward, especially for smaller businesses, but does not give a complete picture of the overall financial position of a company, as it does not show revenues and expenses pending.
Types of Accounting Standards with Examples
The topic becomes easier when the types of accounting standards with examples are understood, for every accounting standard has its application in the real world. These examples help students and businesses know the proper utilization of each rule. Revenue Recognition Standards According to the revenue recognition standards, companies must make income reports and write them in their books as revenue-generating activities occur.
Revenue Recognition Standard
The revenue recognition standard guides companies on when to recognise income. Companies must recognise revenue when a product is delivered or a service is completed, not when cash is received. This shows an accurate picture of earnings.
Inventory Valuation Standard
Inventory valuation standards explain how businesses should value their stock. They must record inventory at the lower of cost or market value. This ensures that companies do not overstate the value of their stock.
Lease Accounting Standard
Lease accounting standards require companies to record leased assets and liabilities on the balance sheet. It shows that companies use resources even if they do not own them, giving a complete financial picture.
Depreciation Accounting Standard
Depreciation accounting standards guide how to spread the cost of an asset over its useful life. This helps companies match the cost of using an asset with the income generated.
Investment Accounting Standard
Investment accounting standards guide how to record investments like shares and bonds. Companies must value investments fairly and disclose their impact on financial statements.
Importance of Accounting Standards
Knowing the importance and purpose of accounting standards assists companies in understanding why adhering to them is essential. Accounting standards are not mere niceties. They have practical applications that benefit investors, regulators, and companies.
Setting up Credibility with Investors
Accounting standards help investors establish credibility. Investors need to be given clear and accurate information upon which they make decisions. Standards give confidence that financial statements are credible and uniform between companies.
Improving Financial Transparency
Accounting standards help improve financial openness. Companies cannot hide losses or inflate profits without clear guidelines. Such openness creates a strong economic market.
Compliance with the Law and Regulation
Accounting standards enable firms to observe the law and regulatory obligations. Compliance with such norms keeps firms away from penalties and earns them a good reputation.
Maintaining Fair Competition
When all firms use the same accounting standards, there is equal competition. Investors can compare firms easily and decide where to put their money intelligently.
Supporting Economic Growth
Clear and transparent financial reporting supports economic growth. It encourages domestic and foreign investments and builds a strong economy.
Types of Accounting Standards in Indian and International Contexts
Accounting standards work differently in India and across the world. Understanding the types of accounting standards in India and international accounting standards is essential for students and businesses operating globally.
Accounting Standards in India
The Institute of Chartered Accountants of India (ICAI) issues the accounting standards in India. India uses Ind AS, which aligns with IFRS but has local adaptations to suit Indian needs. These standards ensure uniform financial reporting across Indian companies.
International Accounting Standards
International accounting standards were developed by the International Accounting Standards Committee (IASC). Later, IFRS replaced IAS. These standards aim for global consistency in financial reporting and are followed by many countries worldwide.
IFRS vs Indian GAAP
Knowing IFRS vs Indian GAAP assists global companies. IFRS is principles-based and fair value, providing flexibility. Indian GAAP is rule-based and more historically cost-oriented. Knowing both assists companies in preparing financial reports for global and local audiences.
Overview of Accounting Standards
The overview of accounting standards illustrates that financial reporting would be disorganized without standardized accounting standards. Accounting standards ensure financial statements are accurate, transparent, and reliable for investors and regulators.
Relevance to ACCA Syllabus
Financial reporting is a big part of the ACCA qualification, so being aware of various accounting standards is very important. ACCA wants students to apply and understand International Financial Reporting Standards (IFRS) and local GAAP, where appropriate. Good awareness of types of accounting standards becomes the foundation of more advanced subjects like financial reporting, auditing, and analysis under the ACCA course.
Types of Accounting Standards ACCA Questions
Q1: Which accounting system is primarily taught in ACCA for global financial reporting?
A) US GAAP
B) IFRS
C) Indian GAAP
D) ASPE
Ans: B) IFRS
Q2: Which IFRS standard establishes the guidelines for revenue recognition?
A) IFRS 2
B) IFRS 9
C) IFRS 15
D) IFRS 10
Ans: C) IFRS 15
Q3: In accounting standards, which concept makes financial statements comparable over different periods and firms?
A) Relevance
B) Comparability
C) Materiality
D) Timeliness
Ans: B) Comparability
Q4: IFRS and US GAAP illustrate what accounting standards are used.
A) National Standards
B) International and National Standards
C) Regional Standards
D) Professional Standards
Ans: B) International and National Standards
Q5: Which standard addresses the treatment of leases in IFRS?
A) IFRS 13
B) IFRS 9
C) IFRS 16
D) IFRS 2
Ans: C) IFRS 16
Relevance to US CMA Syllabus
The US CMA syllabus focuses on external financial reporting decisions, wherein the knowledge of various accounting standards, such as US GAAP and IFRS, is crucial. Accounting standard knowledge facilitates major topics like financial statement preparation, revenue recognition, asset valuation, and liability treatment that are critical for CMA Part 1 exam success.
Types of Accounting Standards CMA Questions
Q1: Which framework mainly regulates US financial reporting in the CMA syllabus?
A) IFRS
B) US GAAP
C) Indian GAAP
D) ASPE
Ans: B) US GAAP
Q2: What principle under US GAAP emphasises that revenue should be recognised only when earned and realisable?
A) Matching Principle
B) Revenue Recognition Principle
C) Conservatism Principle
D) Full Disclosure Principle
Ans: B) Revenue Recognition Principle
Q3: Who issues US GAAP standards?
A) IASB
B) FASB
C) SEC
D) PCAOB
Ans: B) FASB
Q4: What kind of accounting standard is ASC 842 about?
A) Financial Instruments
B) Leases
C) Income Taxes
D) Consolidations
Ans: B) Leases
Q5: Which accounting standards framework is a convergence project with IFRS standards?
A) ASPE
B) FRS
C) US GAAP
D) IPSAS
Ans: C) US GAAP
Relevance to US CPA Syllabus
THE US CPA exam evaluates in-depth knowledge of US GAAP and variations with IFRS. The FAR section of the exam strongly focuses on accounting standards, recognition of revenue, accounting for leases, and fair value measurement. A firm grasp of accounting standard types is essential to pass and utilise the CPA exams in actual audits and financial reporting assignments.
Types of Accounting Standards: CPA Questions
Q1: Which US GAAP standard deals with revenue from contracts with customers?
A) ASC 606
B) ASC 842
C) ASC 815
D) ASC 740
Ans: A) ASC 606
Q2: Who develops IFRS standards worldwide?
A) FASB
B) AICPA
C) IASB
D) SEC
Ans: C) IASB
Q3: What is the main difference between IFRS and US GAAP?
A) IFRS is rules-based, US GAAP is principles-based
B) Both are rules-based frameworks
C) IFRS is principles-based, US GAAP is rules-based
D) Both are principles-based frameworks
Ans: C) IFRS is principles-based, US GAAP is rules-based
Q4: Which accounting framework does the US CPA FAR section mainly deal with?
A) IFRS
B) Indian GAAP
C) US GAAP
D) IPSAS
Ans: C) US GAAP
Q5: According to IFRS, how is inventory priced?
A) Lower of cost or market value
B) Net realisable value or cost, whichever is lower
C) Cost or fair value higher
D) Always historical cost
Ans: B) Net realisable value or cost, whichever is lower
Relevance to CFA Syllabus
The CFA syllabus addresses IFRS and US GAAP standards in the area of Financial Reporting and Analysis (FRA). Candidates should know accounting standards to interpret financial statements internationally. Accounting standard knowledge benefits CFA subjects such as asset valuation, reporting of revenue, and financial statement analysis.
Types of Accounting Standards CFA Questions
Q1: In CFA, what framework is given prominence for financial reporting?
A) IFRS
B) US GAAP
C) Both IFRS and US GAAP
D) Local GAAPS only
Ans: C) Both IFRS and US GAAP
Q2: Which accounting principle says that expenses should match revenues they assisted in generating?
A) Revenue Recognition Principle
B) Matching Principle
C) Full Disclosure Principle
D) Cost Principle
Ans: B) Matching Principle
Q3: Which organisation develops IFRS?
A) SEC
B) PCAOB
C) IASB
D) FASB
Ans: C) IASB
Q4: Under IFRS, when should revenue be recognised?
A) Only after cash collection
B) When performance obligations are satisfied
C) At the time of invoice generation
D) At year-end
Ans: B) When performance obligations are satisfied
Q5: Which accounting framework focuses more on fair value measurement?
A) US GAAP
B) IFRS
C) Indian GAAP
D) ASPE
Ans: B) IFRS
