Accounting Standards:

Meaning, Nature and Merits

Let us make an in-depth study of the meaning, nature and

merits of accounting standards.

Meaning of Accounting Standards:

“Standards” in accounting literature used to be generally known as
principles a few years back. The credit goes to English people in
England who introduced the term ‘standard’ by setting up their
Accounting Steering Committee at the end of 1969 in place of
‘principles’. However in America the term was used and became
popular after establishment of FASB in 1973 where as in India the
term became popular with formation of ASB by ICAI in 1977.

Standards are written statements issued by various

professional institutes. Littleton defines standard as
follows:

“A standard is an agreed upon criteria of what is proper practice in a

given situation; a basis for comparison and judgment; a point of
departure when variation is justifiable by the circumstances and
reported as such. Standards are not designed to confine practice
within rigid limits but rather to serve as guide posts to truth,
honesty and fair dealing. They are not accidental but intentional in
origin: they are expected to be expressive of the deliberately chosen
policies of the highest types of businessmen and the most
experienced accountants. They direct a high but attainable level of
performance, without precluding justifiable departures and
variations in the procedures employed”.

Accounting Standards deal with mainly financial measurements and

disclosures and can be considered as technical response to calls for
better financial accounting and reporting. Accounting Standards
help in achieving Uniformity in accounting practices.

Nature of Accounting Standards:

Accounting standards dominate the work of accountants. These
standards are being changed, added and deleted with passage of
time. Accounting standards act as guidelines and handy rules for
the conduct of accounting work. Any accounting standard usually
consists three parts.

(i) A description of the problem to be handled

(ii) Discussion of ways of solving the problems

(iii) In the light of discussion the prescribed solution.

Merits of Accounting Standards:

Accounting practices have created. Standards are there to help
accountants to apply those accounting practices regarded as the
most suitable for the situations covered.

The merits of standards can be studied as under:

1. Standards Improve Reliability of Financial Statements:
Reliability of financial statements depends upon reliable accounting
data. Various users of financial statements of business organisation
use financial statements for making some important decisions.
These important decisions which they want to take should be based
on fair and true financial statements standards help the accounting
professionals to create a general sense of confidence. Standards also
help to harmonies divergent accounting practices. Standards
protect the users of financial statements by providing them financial
information in which they can have confidence.

2. Helpful for Accounting Professionals:

Accounting professionals, like accountants and auditors have to
perform their work in changing environment of legal bindings.
Accountants have to maintain their accounts in the fear of threats of
stern actions. Whereas auditors are also to do audit work for
detecting frauds and misleading information’s presented in
financial statements. Accounting standards help the accountants
and auditors while performing their duties.

3. Accounting Reforms:

Accounting standards are also helpful in development of a logical

conceptual framework and structure for measurement of
information, objectives of financial reporting. Accounting standards
have helped in sweeping reforms in accounting theory as well as in
accounting practices.

4. Determining Managerial and Corporate Accountability:

Standards also facilitate in determining corporate and managerial
accountability. Standards are important factors in assessment of
managerial performance. Standards ensure consistency and
comparability in place of uniformity in financial reporting.
Management always concentrate on choice of best alternative for
performing any activity, standards act as best choice available to
them.