Benefits and Limitation of Accounting Standards-Meaning,Understanding (Commerce Achiever)

Benefits of Accounting Standards

Accounting Standards are the ruling authority in the world of accounting. It makes sure that the information provided to potential investors is not misleading in any way. Let us take a look at the benefits of AS.

1] Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They even have a standard format for financial statements. These are steps in achieving uniformity in accounting methods.

2] Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their information. Many of these stakeholders base their decisions on the data provided by these financial statements. Then there are also potential investors who make their investment decisions based on such financial statements.

So it is essential these statements present a true and fair picture of the financial situation of the company. The Accounting Standards (AS) ensure this. They make sure the statements are reliable and trustworthy.

3] Prevents Frauds and Accounting Manipulations

Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must follow. One outcome of this is that the management of an entity cannot manipulate with financial data. Following these standards is not optional, it is compulsory.

So these standards make it difficult for the management to misrepresent any financial information. It even makes it harder for them to commit any frauds.

4] Assists Auditors

Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format. These policies have to be followed. So if an auditor checks that the policies have been correctly followed he can be assured that the financial statements are true and fair.

5] Comparability

This is another major objective of accounting standards. Since all entities of the country follow the same set of standards their financial accounts become comparable to some extent. The users of the financial statements can analyze and compare the financial performances of various companies before taking any decisions.

Also, two statements of the same company from different years can be compared. This will show the growth curve of the company to the users.

6] Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can help measure the management’s ability to increase profitability, maintain the solvency of the firm, and other such important financial duties of the management.

Management also must wisely choose their accounting policies. Constant changes in the accounting policies lead to confusion for the user of these financial statements. Also, the principle of consistency and comparability are lost.

Limitations of Accounting Standards

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating the standards to restrict these limitations.

Accounting standards have important role in the accounting system. Apart from their importance, they have certain limitations also. Some of these limitations are discussed below:

Brings Inflexibility & Rigidity

It is one of the major disadvantage of accounting standards. Accounting standards basically establish each & every principles and rules for accounting treatment. Every company is required to follow the same principles constantly.

Therefore all companies are required to fit themselves into guidelines of accounting standards. Every companies goes through different situations & have different financial transactions. Sometimes it becomes difficult for them to follow the same guidelines.

Involves High Costs

Another disadvantage of following accounting standards is that it involves high costs. Implementing accounting standards in your accounting standards is too costly.

Company need to change their entire procedures, upgrade their systems & provide their employee’s training accordingly. Companies need to monitor whether employees are correctly following standards. All these activities require large costs for bringing changes.

Difficult To Choose Among Alternatives

Choosing among different alternatives available is another disadvantage of Accounting standards. Accounting standards provides many options for treatment of the same accounting concept.

It becomes difficult for companies to decide which one is best for them. Accounting standard does not clearly state that which one is the appropriate choice. For ex. for stock valuation there are 3 alternatives available. These are weighted average, FIFO & LIFO method. Choosing which one is best is difficult task.

Scope Is Restricted

The accounting standards are followed in accordance with prevailing laws & statutes.  Accounting standards cannot override the statutes & laws. These standards are created & framed in accordance with prevailing laws. Using these standards as per the prevailing laws can limit & restricts their scope.

Time-Consuming

Another drawback of Accounting standards is that it is time-consuming. Implementation of accounting standards requires many steps to be followed to prepare financial report. It makes the process of preparing financial statements complex & time-consuming.

It defines each & every step for preparation of financial reports.  Accounting standards involves income statement, trial balance & balance sheet preparation. Accountants need to strictly comply with rules of accounting standards. It makes their work complex & rigid.