In accounting, for every basis, identification and measurement of the elements of financial statement and the impact of the circumstances and financial status and work results should be defined in a form of standards. These standards are like the rules for accounting in any country. That is why they denote what should be mentioned in any company’s accounts. Moreover, they guarantee that certain cases, approaches and requirements are taken into account normally. In addition, they help people who are interested in investment to make decisions by ensuring that they get appropriate information needed. This is the idea behind accounting standards.
When we talk about accounting standards, the main thing that comes under them is the accounting report. According to the International Accounting Standards Committee (IASC), accounting reports are documents filled out by brokers that give details and facts about a new client’s financial circumstances and investment objectives. The report may be updated if there are material changes in a client financial position. Based on the report, a client may or may not be deemed eligible for certain types of risky investments such as commodity trading or highly leveraged limited partnership deals.
The second main thing is the accounting framework. According to the Financial Accounting Standards Board in the US, the conceptual framework is the system of fundamentals and objectives that make consistent standards by knowing that the accounting report does not mean the rules but the guidelines. Actually, rules are set in the accounting standards which we can formulate from the framework. But when we face an interpretation conflict, it takes some requirements over the framework.
Advantages and Disadvantages of Accounting Standards
The advantages of regulating accounting information through accounting standard are protecting investors. Accounting standards will increase the confidence of investors to invest the business. It is because investors interest to realize that their money will finally earn and go back to them. In additional, investors’ interests are ensured as the documents they review are definitely correct and authentic. Thus, it is very important accounting information for investors.
Next, understandability is an advantage of regulating accounting information through accounting standard. FASB published the accounting standards to represent the required processes for businesses to succeed. As creating financial statements, users expect companies to follow the published accounting standards. In additional, interpreting the results reported when these users depend the assumptions set forth in the accounting standards. Same of assumptions is used by the users interpret the financial statements of different companies. Once the users realize these assumptions, they use this knowledge when learning any financial statement.
Besides that, the guidance is other advantages of regulating accounting information through accounting standard. Using accounting standards concerns that accountants are provided by the guidance. The accountant may refer to the published accounting standard to determine how to record the event when financial reporting issues arise. These issues include new accounting transactions deriving from technology, such as Internet sales, or new operation incorporated by the corporation, similarly changes in pension plans. When creating accounting standards, the FASB incorporates the needs of financial statement users likewise company feedback. This process allows the accountant to believe that the guidance contribute the accounting standard passed the rigidity process of establishing that it matches everyone’s needs.
Lastly, the advantages of regulating accounting information through accounting standard is flexible. Flexibility is one of the main principles-based accounting method. As the financial world becomes more complicated, it becomes progressively problem to create standardized regulations for the whole economy. Principles-based accounting provides companies to arrange their financial statements as they see best to guard accurate disclosure of their current position. The harsh format of rules-based accounting made disclosure more work and at times less informative. For example, the company would not have the proficiency to list industry specific data in the manner it thought best.
The disadvantage of regulating accounting information through accounting standards is cost to comply. Using the accounting standard considers the costs for the company to comply with the standard. The company needs to change their procedures, which requires a large financial investment that includes employee labor costs, system upgrades and employee training. For example, the company needs to have someone to monitor people are correctly applying the standards and have to train people to adopt the standard. In these circumstances, it requires time and money. Thus, the cost of the company will increase.
In addition, we can see that the accounting standards involve trial balance, income statement and balance sheet. The accountants compel to follow each step continuously to prepare the financial statement. This will make the restriction for the accountants. The accountants cannot do financial report in their own ways.
Lastly, following the accounting standards to prepare the financial report, it requires a lot of steps to prepare. For example, record all amount into journal then record it to ledger. After that we get the balance from ledger and record to the trial balance. The trial balance was prepared then we can proceed to our income statement and balance sheet. All the procedure may take a long time to prepare it. If the company has many branches, the accountants will take few months to prepare the financial report.
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