Page 48 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 3.1.1 Meaning of Accounting Standards

It is a set of Certain generally accepted rules, principles, concepts and conventions issued by the
Institute of chartered Accountants of India in consultation with other International Accounting
bodies. The purpose of making uniform rules and principles is to make the preparation and
presentation of financial statement easy, relevant, reliable, understandable and finally
comparable. In other words, Accounting standards are the basis of accounting policies and
practices to facilitate the recording of transactions and events in such a way which can change
them into financial statements, to be used by the persons interested in getting the correct and
reliable information with a view to take future decisions.

The basic objective of Accounting Standards is to remove variations in the treatment of several
accounting aspects and to bring about standardization in presentation. They intent to harmonize
the diverse accounting policies followed in the preparation and presentation of financial statements
by different reporting enterprises so as to facilitate intra-firm and inter-firm comparison.

3.1.2 Need and Formulation of Accounting Standards

The adoption and appreciation of accounting standards ensures uniformity, comparability and
qualitative improvement in preparation and presentation of financial statements. So, that they
may give true and fair picture. What is the need of adoption of accounting standards in the
accounting process? How do the accounting standards help in improving the quality of the
financial Statement? The answer of these questions may be explained by an example, suppose a
company adopts LIFO method for the valuation of its closing stock and another company adopts
FIFO method for the valuation of its closing stock, valuation of the closing stock of both the
companies will differ. As a result the profit or loss of both companies will also differ. In order to
avoid such situation, AS-2 is made.

Take another example of depreciation, if a company adopts diminishing balancing method for
the depreciation and another company adopts the fixed installment method for depreciation,
the amount of depreciation of both the companies will differ. As a result profit/loss will also differ
and the comparison of these companies will not be possible. For the purpose AS-6 is prepared by
ICAI in India. Similarly, AS-1 gives guidelines for the disclosure of accounting policies, so that the
users of financial statements may perceive the reported profits in its correct perspective.

Did u know? In India, the Accounting Standards are formulated by the Accounting Standard
Board (ASB).
ASB determines the broad area requiring for formulation of AS. At the time of preparation of
Accounting Standards, ASB gets help from different groups for this purpose a study group is
made. In this group the members of ICAI participates. Then a wide discussion is held. In this
discussion, the representatives of Government, Public Sector Units, and other organizations
participate. After the discussion an Exposure Draft (ED) for AS is proposed and issued by ICAI.
Then it is dispatched to different outside bodies as ICWAI, ICSI, CBDT, SCOPE, etc. This ED
comprises the following points:
1. A Statement of concepts and fundamental accounting principles relating to the standard.

2. Definitions of the terms used in the standard.
3. The manner in which the accounting principles have been applied for the formulation of
the standard.

4. The presentation and disclosure requirements in complying with the standard.

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