Definition of the accounting standard


What is an accounting standard?

An accounting standard is a common set of principles, standards, and procedures that define the basis for financial accounting policies and practices.

Key points to remember

  • An accounting standard is a set of practices and policies used to systematize bookkeeping and other accounting functions across businesses and over time.
  • Accounting standards apply to an entity’s entire financial position, including assets, liabilities, revenues, expenses and equity.
  • Banks, investors and regulators rely on accounting standards to ensure that information about a given entity is relevant and accurate.

Understanding accounting standards

Accounting standards improve the transparency of financial information in all countries. In the United States, generally accepted accounting principles (GAAP) form the widely accepted set of accounting standards for the preparation of financial statements. International companies follow International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board and serve as guidelines for non-US GAAP companies that issue financial statements.

Generally accepted accounting principles are widely used by public and private entities in the United States. The rest of the world mainly uses IFRS. Multinational entities are required to use these standards. The International Accounting Standards Board (IASB) establishes and interprets the accounting standards of the international communities when preparing financial statements.

Accounting standards relate to all aspects of an entity’s finances, including assets, liabilities, revenues, expenses and equity. Specific examples of accounting standards include revenue recognition, asset classification, allowable depreciation methods, what is considered depreciable, lease classifications, and measurement of units outstanding.

The American Institute of Accountants, today known as the American Institute of Certified Public Accountants, and the New York Stock Exchange attempted to initiate the first accounting standards in the 1930s. Following this attempt came the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission. Accounting standards have also been established by the Governmental Accounting Standards Board for the accounting principles of all state and local governments.

Accounting standards specify when and how economic events should be recognized, measured and displayed. External entities, such as banks, investors, and regulators, rely on accounting standards to ensure that relevant and accurate information is provided about the entity. These technical pronouncements ensured transparency in reporting and defined the limits of financial reporting measures.

US GAAP accounting standards

The American Institute of Certified Public Accountants developed, managed, and promulgated the first set of accounting standards. In 1973, these responsibilities were given to the newly created Financial Accounting Standards Board. The Securities and Exchange Commission requires all listed companies to follow US GAAP accounting standards when preparing their financial statements for listing on a US stock exchange.

Accounting standards ensure that the financial statements of several companies are comparable. Because all entities follow the same rules, accounting standards make financial statements credible and enable more economic decisions based on accurate and consistent information.

Financial Accounting Standards Board (FASB)

An independent, not-for-profit organization, the Financial Accounting Standards Board (FASB) has the authority to establish and interpret generally accepted accounting principles (GAAP) in the United States for public and private businesses and not-for-profit organizations. . GAAP refers to a set of standards for how companies, non-profit organizations and governments should prepare and present their financial statements.

Why are accounting standards useful?

Accounting standards improve the transparency of financial information in all countries. They specify when and how economic events should be recognized, measured and displayed. External entities, such as banks, investors, and regulators, rely on accounting standards to ensure that relevant and accurate information is provided about the entity. These technical pronouncements ensured transparency in reporting and defined the limits of financial reporting measures.

What are generally accepted accounting principles (GAAP)?

In the United States, generally accepted accounting principles (GAAP) form the widely accepted set of accounting standards for the preparation of financial statements. Its objective is to improve the clarity, consistency and comparability of the communication of financial information. Basically, it is a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements.

What are International Financial Reporting Standards (IFRS)?

International companies follow International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board and serve as guidelines for non-US GAAP companies that issue financial statements. They have been established to bring consistency to accounting standards and practices, regardless of company or country. IFRS are considered more dynamic than GAAP in that they are regularly revised in response to an ever-changing financial environment.

Previous New accounting standard presents unique challenges for AAS providers
Next Definition of Financial Accounting Standard 157 (FAS 157)