Why Do We Need Accounting Standards

In: Business and Management

Submitted By samikhan
Words 827
Pages 4
Introduction:

The basic purpose of accounting is to prepare financial information for internal and external users. Accounting standards play a key role in financial reporting and help users to make informed decisions. Levitt (1998) highlighted the importance of accounting standards as ‘educated investors need relevant, useful information to make their investment decisions’ and he emphasises that this can be achieved by high quality accounting standards. Up to 1970s, there was no uniform system for the preparation of financial statements and different companies used different policies, principles and bases according to their needs. This practice led to inconsistency between the financial statements of different entities or same entities prepared by different people, and made their comparison very difficult for different users. Dyson (2011) highlights this situation as ‘what was particularly puzzling to the public was that at the beginning of the week one set of accountants could decide that a company had made a profit and then by the end of that week another set of accountants would decide that it had actually made a loss’. This prompted the accountancy profession to regulate the accounting information and develop uniform principles and procedures which are today known as accounting standards. Accounting standards are statements of standard accounting practice issued by such body or bodies as may be prescribed by regulations (CA 2006, S464(1)). In the UK Financial Reporting Standards (FRSs) are issued by Accounting Standards Board (ASB) (Dyson, 2011).

Companies Act 2006 (S393) requires that financial statements of a company show a ‘true and fair view’ of the transactions made during the accounting period. Accounting standards play an important role to comply with this statutory requirement by outlining the specific procedures and bases for the…...

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