Question

Please explain the need for standards/rules (not ethical rules) in the accounting practice and how they have evolved over time

Answer 1

STEP 1

MEANING OF ACCOUNTING STANDARDS AND RULES -

Accounting standards refers to the prescribed accounting principles and rules, and procedure for preparing, measuring, recording, treatment , presentation of the accounting transaction in the financial statements.This rules are followed by each and every organisations, for the sake of understanding the financial statements of every organisation by the users. By following same principles/rules/standards, organisations users has a ease of understanding financial statements of each and every organisation and also to compare the two organisation's financial statements, because of same rules and standards are applied in all organisation.  

STEP 2-

STANDARDS AND RULES FOLLOWED BY THE FINANCIAL ORGANISATIONS -

Generally, now in all the organisation, GAAP(GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ) ARE FOLLOWED.

THERE ARE TEN BASIC PRINCIPLES FOLLOWED BY THE ORGANISATIONS ARE: -

• THE BUSINESS AS A SINGLE ENTITY CONCEPT- This principle states that the business has its separate legal entity in the eyes of law. Business and its owner has different entity. All its activities are treated seperately from that of its owner.
• THE SPECIFIC CURRENCY PRINCIPLE OR MONEY MEASUREMENT CONCEPT- This principle states that in all the financial statements, money measurement concept is followed which means all the transactions are recorded only when it is measured in terms of money.
• CONSISTENCY OR SPECIFIC TIME CONCEPT- This principles refers to the consistency applied time period for preparation of financial statements. All the financial statements has a starting and ending date, this period is called time period. So, consistencly same time period should be applied for the ease of understanding of financial statements.
• HISTORICAL COST CONCEPT - This refers to the cost which should be followed while recording transaction in the financial statements. So, historical cost means the cost at which the items are purchased and sales. Prices changes due to change in time, but this changed price should not be recorded, that historical cost at which the item is purchase or sell is recorded.
• FULL DISCLOSURE CONCEPT - This principle refers to the concept which focuses on the reveal of every information whuich is usefull for the orgasnisation must be disclosed.
• THE RECOGNITION PRINCIPLE - This principle refers to the concept in which that companies should recognise the revenue and loss at the same time when accured.
• GOING CONCERN PRINCIPLE - This principle refers to the concept in which all the business runs, which states that the business will run for long and long time period irrespective of death, lunancy of partners and its owner.
• THE MATCHING PRINCIPLE - This principle refers to the concept which states that the accural system of accounting is used, where the revenue should be matched with the expenses of the period.
• MATERIALITY PRINCIPLE - This principle states that the business should disclose all its informastion which seems to be material forthe company, then it should be added to the financial statement.Otherwise, the financial information prepared will seems wrong and the judgement or future decision will be not appropriate for the organisation.
• THE PRINCIPLE OF CONSERVATIVE ACCOUNTING - ThIs principle refers to the concept which states that expenses must be recorded when they happen and income will record only when the cash has been received.​​​

THIS PRINCIPLES ARE FOLLOWED BY THE COMPANIES, TO PREPARE THE FINANCIAL STATEMENTS. SAME PRINCIPLES ARE FOLLOWED BY ALL THE COMPANIES FOR THE EASE OF UNDERSTANDING THE FINANCIAL INFORMATION BY THE USERS.

STEP -3

* IMPORTANCE OF ACCOUNTING PRINCIPLES/ RULES-

• PROVIDES NORMS - Accounting standards provides norms or rules for preparing the financial statements. This rules are followed by all the organisation, for minimise the diversification of accounting policies and procedures by providing same language to understand the financial information and statements.
• ENSURE UNIFORMITY - By removing diversification, accounting standards ensures uniformity in the preparation of financial statements. By applying same accounting standards, financial statements become more meaningfull and comparable.
• CREATE A SENSE OF CONFIDENCE - By applying same accounting standards and rules,it creates a sense of confidence among the users of the financial information as they can easily understand the financial information.
• HELP AUDITORS - This refers that, by applying same accounting principles, same accounting language, it can easily be audited without any hindrances. It will help auditors in auditing the accounts.
• RELIABILITY OF FINANCIAL STATEMENTS - By applying same accounting standards, principles and rules, the reliability of financial statements increases with the uniformity in accounting language.

STEP -4

THE ACCOUNTING PRINCIPLE WHICH IS FOLLOWED THE MOST, IS GAAP( GENERALLY ACCEPTED ACCOUNTING PRINCIPLES). ACCOUNTING PRINCIPLES EVOLVED OVER TIME TO TIME ACCORDING TO THE NEED OF ACCOUNTING PRACTICES, AS NEW ACCOUNTING SITUATION ARISES DAY TO DAY, FOR RECORDING THESE SITUATIONS, NEW RULES ARE EVOLVED OVER TIME.

LIKE, IFRS(INTERNATIONAL FINANCIAL REPORTING STANDARDS ), IT IS EVOLVED ACCCOUNTING STANDARD, ARISE DUE TO CHANGING BUSINESS ENVIORNMENT OR SITUATION. IFRS ARE A SET OF ACCOUNTING STANDARDS ISSUED BY IASB, WHICH CAME INTO EXISTENCE IN THE YEAR 2001.

THE OBJECTIVES OF IFRS ARE SAME AS GAAP HAVING LITTLE MUCH DIFFERENCES .

THE MAIN DIFFERENCE BETWEEN GAAP AND IFRS ARE -

IFRS ARE BASED ON PRINCIPLES AND FAIR VALUE AND ACCOUNTING STANDARDS ARE BASED ON RULES AND HISTORICAL VALUES.

BY THE ABOVE EXPLAINATION, WE CAN UNDERSTAND THAT THE ACCOUNTING PRACTICES AND RULES ARE EVOLVED ACCORDING TO THE NEW SITUATIONS OVER TIME WITH LITTLE MUCH DIFFERENCES NEEDED.