Accounting standards are the way businesses maintain an overview of their finances. They boil down to a simple principle: a standardization of accounting practices across the U.S. and other countries.
Accounting, financial management, and financial statements are part of business.
While they can seem baffling to navigate, there are organizational bodies whose sole job is to make it easier.
They help accountants, investors, and other key stakeholders regulate processes and maintain financial documents.
The importance of accounting standards
Accounting standards’ origins can be traced back to the aftermath of the Great Depression.
They were initially proposed by the American Institute of Certified Public Accountants and the New York Stock Exchange in the 1930s. followed by the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC).
The responsibility to understand accounting standards by category largely falls on accountants themselves. However, the differences between accounting standards categories are also necessary for banks, investors and government agencies. It is to make informed decisions about where their money goes.
If information is irrelevant, outdated or inaccurate, then these entities cannot properly do their jobs, potentially throwing the whole financial subset of the business world off-balance.
Categories of accounting standards
Financial needs and processes can vary, but accountants are bound by standards specific to the type of their work.
These are the three standards of professional categories relevant to U.S. businesses:
Private and publicly traded companies: In these companies, accountants use GAAP standards (Generally Accepted Accounting Principles), which are created and upheld by the Financial Accounting Standards Board (FASB).
Only publicly traded and regulated companies are required by the SEC to follow GAAP, but private companies also follow these for internal management convenience. These principles include revenue recognition, balance sheet item classification and outstanding share measurements.
Global companies: With how connected our world is today, it is possible to have a business that has a global reach.
Accountants for these businesses use the International Financial Reporting Standards (IFRS). Developed by the International Accounting Standards Board, IRFS is designed to bring fairness to financial reporting documents.
Government: Anyone working for state and local government bodies will use the government standards developed by the Governmental Accounting Standards Board (GASB).
While divergent in some areas of their financial and accounting guidance, FASB, IFRS, and GASB have a common goal. Develop updated principles and standards that cover a wide spectrum of tasks, such as assets, equity, revenue, expenses, and liability.
GAAP, for example, standardizes accounting related to the measurement of financial activity. Also, disclosure of financial information, summarizing financial information and recording financial measurements.
This generous scope means standardization bodies frequently update, revise and add standards to mirror the climate of the business world and its needs.
Compliance relies on high-quality, ethical accountants, as the standards will be open to some level of interpretation.