Elements of Accountancy · Ch 2 — Theory Base of Accounting
Accounting Standards
Accounting Standards
Accounting Standards
Accounting standards are written policy documents that cover the recognition, measurement, treatment, presentation, and disclosure of accounting transactions in financial statements. Think of them as the rulebook that tells every accountant exactly how to handle each type of transaction so that the final financial statements are reliable and comparable.
An accounting standard is an authoritative statement issued by the Institute of Chartered Accountants of India (ICAI), which is the professional body of accountants in our country. When ICAI issues a standard, it becomes mandatory for all enterprises following that standard to comply with it.
Objective of Accounting Standards
The primary objective is to bring uniformity in different accounting policies. Without standards, two companies could use completely different methods to account for the same transaction, making it impossible to compare their financial statements. By eliminating this non-comparability, accounting standards enhance the reliability of financial statements.
Second, accounting standards provide a set of standard accounting policies, valuation norms, and disclosure requirements. This means every company knows exactly what policies to follow, how to value assets and liabilities, and what information must be disclosed in the financial statements.
In addition to improving the credibility of accounting data, accounting standards enhance comparability of financial statements — both intra-enterprise (comparing the same company across different years) and inter-enterprise (comparing different companies). Such comparisons are very effective and widely used by users of accounting information to assess firms' performance.
Need for Accounting Standards
Accounting extends information to various users. Accounting information can serve the interest of different users only if it possesses uniformity and full disclosure of relevant information. There can be alternate accounting treatments and valuation norms which may be used by any business entity. Accounting standards facilitate the scope of those alternatives which fulfil the basic qualitative characteristics of a true and fair financial statement.
Benefits of Accounting Standards
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Eliminates variations — Accounting standards help in eliminating variations in accounting treatment while preparing financial statements. Every company follows the same rules, so the resulting statements are consistent.
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Mandates useful disclosures — Accounting standards may call for disclosures of certain information which may not be required by law, but such information might be useful for the general public, investors, and creditors. This ensures transparency beyond what the law minimally demands.
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Facilitates comparability — Accounting standards facilitate comparability between financial statements of inter and intra companies. Investors can meaningfully compare the performance of two different companies or the same company over different periods.
Limitations of Accounting Standards
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Difficult choice among alternatives — Accounting standards make choice between different alternate accounting treatments difficult to apply. When multiple methods are permitted, selecting the most appropriate one becomes a challenge.
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Rigidity — Standards are rigidly followed and fail to extend flexibility in applying accounting standards. Sometimes a rigid rule may not suit a particular business situation, but the company has no choice but to follow it.
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Cannot override the statute — Accounting standards cannot override the law. The standards are required to be framed within the ambit of prevailing statutes. If a law says something different from an accounting standard, the law prevails.
Accounting standards are authoritative guidelines issued by ICAI that bring uniformity, enhance reliability, and ensure comparability of financial statements. However, they are rigid and cannot override the law.
Summary from the Chapter
As stated in the chapter's summary, accounting standards are written statements of uniform accounting rules and guidelines in practice for preparing uniform and consistent financial statements. These standards cannot override the provisions of applicable laws, customs, usages, and business environment in the country.
Goods and Services Tax (GST)
Goods and Services Tax (GST) — "One Nation, One Tax" — is a destination-based tax on the consumption of goods and services. It is levied at every stage of supply, from manufacture right up to final consumption, with credit for the tax paid at each earlier stage available as a set-off. In effect, only the value added at each stage is taxed, and the ultimate burden falls on the final consumer.
GST has a dual structure: the Centre and the States levy it simultaneously on a common tax base. It has three components:
| Component | Full form | Levied on | Revenue goes to |
|---|---|---|---|
| CGST | Central Goods and Services Tax | Intra-state supply | Central Government |
| SGST | State Goods and Services Tax | Intra-state supply | State Government |
| IGST | Integrated Goods and Services Tax | Inter-state supply (and imports) | Collected by the Centre, shared with the destination State |
On a sale within a state (intra-state), the total GST is split equally into CGST and SGST — for example, on goods worth ₹10,000 at 18% GST (9% + 9%), ₹900 goes to the Centre as CGST and ₹900 to the State as SGST. On a sale from one state to another (inter-state) — and on imports — a single IGST at the full rate is charged and collected by the Centre.
Characteristics of GST
- A common law and procedure across the whole country under a single administration. …