What are Accounting Standards?

//What are Accounting Standards?
What are Accounting Standards? 2017-09-30T04:24:20+00:00

Definition: Accounting standards are rules and guidelines set up by governing bodies, like FASB and IASB, to keep accounting practices consistent and understandable across all companies and industries.

What Does Accounting Standards Mean?

What is the definition of accounting standards? These rules have an impact both on a national economy and on the economic and fiscal policy. With the implementation of accounting guidelines on a national scale, countries are able to implement a common terminology in the economic world and perform a precise, uniform, objective and correct calculation of data on the financial position and results of business units.

The International Accounting Standards (IAS) constitute a single set of high-quality accounting standards, which help in the preparation of consolidated financial statements, including the balance sheet, income statement, statement of changes in the financial position, cash flow statement and explanatory notes.

The standardization of the accounting procedures helps businesses to record and monitor their business activity and achieve comparability of accounting information between companies that operate in the same industry. By applying the same accounting principles and methods, businesses ensure homogeneous, reliable and accurate data and information about their assets, liabilities, financial position, and overall activity.

Let’s look at an example.

Example

Company ABC has bought a second plant for $400,000. In the purchase contract, it is stated that the value of the land is $100,000, and the value of the building is $300,000. Also, the company pays notary fees amounting to $10,000. In addition, Company ABC leases a new machinery for $120,000 and duration of 4 years. The annual rent amounts to $30,000. The initial value of transport is $100,000.

Roger, the company’s accountant needs to record these transactions, using the international accounting guidelines, as follows:

Accounting Standards Example

Once the company signs the lease contract, Roger will make the bottom entry.

Then, he calculates the depreciation of the machinery for the first year, using the straight-line method.

Useful life of the machinery: 4 years

Acquisition cost = $100,000

Annual depreciation = Acquisition cost / useful life = $100,000 / 4 = $25,000.

Summary Definition

Define Accounting Standards: Accounting standard means a rule or guideline for how financial activities are recorded and reported to third parties.