IMPORTANCE OF ACCOUNTING STANDARD

IMPORTANCE OF ACCOUNTING STANDARD:

Accounting standards in the United States appear in the form of the generally accepted accounting principles, a set of standards, guidelines and procedures that are used when accounting for the affairs of most governmental and non-governmental bodies. The interpretation of numbers and the wherewithal to place them in the proper context are at the heart of accounting. Standards exist to ensure that accounting decisions are made in a unified and reasonable way.

Comparability

Paramount to the role of accounting standards is the universality that it brings to financial record keeping. Governmental organizations must follow accounting procedures that are the same as their counterparts, and non-governmental organizations must do the same. The result is that it is easy to compare the financial standing of similar entities. All comparisons within groups are a matter of comparing "apples to apples." This helps both external and internal observers weigh the state of an entity in the context of other comparable entities. For instance, the financial standing of a town can be measured against a neighboring town with the assumption that the pertinent numbers have been reached in a similar fashion.

Transparency

Accounting standards are designed to enforce transparency in organizations. The principles, procedures and standards that make up the generally accepted accounting principles were chosen with the purpose of ensuring that organizations lean in the direction of openness when deciding how to provide information to observers. This kind of transparency is especially important in the case of public entities, such as governments or publicly traded companies. Standards limit the freedom and flexibility of entities to use clever accounting to move items around or even to hide them.

Relevance

Standards work to help entities provide the most relevant information in the most reasonable way possible. In this way, an organization guided by accounting standards will generate the kind of financial information that observers are most interested in examining. Entities ultimately should provide information in a way that most fairly and clearly represents the current financial standing of the operation. The standards make it more difficult for organizations to misdirect observers and to fool them with data that does not have sufficient relevancy.

Audiences

Ultimately, the importance of accounting standards lies in the value that it brings to financial documents for the various audiences that view and make critical decisions based on it. An absence of accounting standards would make the work of investors, regulators, taxpayers, reporters and others more difficult and more risky. For instance, without standards, an investor who has studied the financial statements of a large publicly traded company would not know whether to trust the findings on those statements. Standards mean that taxpayers can see how their tax dollars are being spent, and regulators can ensure that laws are followed.