Introduction to Accounting Principles: Accounting Standards, GAAP, and IFRS
The principles of accounting help in maintaining consistent and uniform accounts. Every body of accounting follows a set of rules and principles which are accepted by accounting professionals. Three most common accounting principles are AS, GAAP, and IFRS. An overview of these principles has been elaborated below.
The following topics have been discussed in this article:
Accounting Standards (AS) are principles of accounting which are issued by the world’s governing and accounting bodies so as to ensure that all organizations follow a uniform set of accounting rules. This will further establish uniformity in the format followed by organization to prepare their financial statements.
Accounting standards are applicable throughout a country so that its whole economy can follow the same set of accounting standards and terminology. Thus, all business units and organizations in that nation will implement a uniform, accurate, and precise format for preparing their financial statements and records.
In India, the Institute of Chartered Accountants of India (ICAI) issues the Indian Accounting Standards (IAS). These accounting standards are adapted from the GAAP and modified accordingly with the Indian economy. The nomenclature and numbering of these standards bear similarity with the IFRS.
Accounting standards sort out accounting conflicts in their detailing, treatment, rules, and directives by providing uniformity in their principles. They are highly detailed and informative thus avoiding any confusion which may arise related to accounting.
The Indian Accounting Standards has a total of 32 standards, out of which the most common ones have been listed below:
- AS-1: Disclosure of Accounting Policies
- AS-2: Valuation of Inventories
- AS-3: Cash Flow Statements
- AS-7: Construction Accounting
- AS-9: Revenue Recognition
- AS-10: Accounting for Fixed Assets
- AS-15: Employee Benefits
- AS-20: Earnings per Share
- AS-26: Intangible Assets
- AS-28: Impairment of Assets
Generally Accepted Accounting Principles (GAAP) is a set of globally accepted principles of accounting. GAAP prescribes certain specified accounting principles, definitions, treatment of confusing entries, and industry-specific rules which ensure a consistency in the financial and accounting statements of all organizations.
The uniformity in accounting formats and principles brought by GAAP allows external readers of financial statements to understand the accounts of a business easily. Making comparisons within a business and between two businesses becomes much easier which further helps investors in making decisions related to investments.
GAAP also aims at ensuring accurate and honest representation of financial statements. The principles of GAAP make sure that accounts are not manipulated by business managements as per their requirements. Proper following of GAAP helps in determining a high level of certainty in the accuracy of a business’ financial statements.
GAAP can however not be said to be a universal code of accounting, as such a thing does not exist as of yet. Specifications and details of GAAP may differ based on the business’ geographic location, accounting body, industry, etc. Just like GAAP has been modified by ICAI in India and FASB in the United States of America, the accounting bodies of several other countries have made specific modifications in GAAP in accordance with their economy and industries.
The International Framework for accounting Records and financial Statements (IFRS) is an accounting and financial framework developed by the International Accounting Standards Board (IASB) which is based out of London, United Kingdom.
Around the world, many countries follow their own accounting principles derived and modified from GAAP. This creates a lack of consistency and uniformity in the accounting and financing formats of various businesses which gives way to confusion. Also, it poses as a conflicting issue to multinational companies which have their branches set up in different nations. This conflict of principles led to the creation of IFRS as a uniform and common framework which could be adopted by all nations as a single global accounting standard.
As of now, IFRS has been adopted by over 120 countries across the globe, and increasing. The businesses across these countries will prepare their accounting reports and financial statements by following the same set of rules prescribed by IFRS. This will bring in uniformity, reduce confusion, make comparison easy, and make nations more compatible with each other.
Some countries have however not accepted IFRS as their accounting standard. These countries include the USA and India, among others. Efforts are still being made to make all nations adopt the IFRS as their accounting standard. Such a convergence up to a cent percent seems quite impossible in a diverse era as today. However, all boards of accounting across the globe are consistently modifying their accounting standards and working towards increasing their similarity with the IFRS.
European countries have adopted most of the IFRS rules and the USA is working on its convergence too. Although, India has not adopted the IFRS as its accounting standard yet, it is working its way towards replacing its IAS with the IFRS soon.