Accounting Standards – Introduction & Importance

Imagine cricket without rules. One umpire says "6 balls per over", another says "8 balls". Chaos!

Accounting Standards are the rules that make financial statements comparable and trustworthy.

What Are Accounting Standards?

Definition: Written statements issued by expert accounting bodies that standardize accounting practices.

In India: Issued by ICAI (Institute of Chartered Accountants of India)

Think of it as: Grammar rules for accounting language.

Why Do We Need Standards?

Problem Without Standards

Scenario: Two companies, both earned ₹10 Lakhs profit.

Company A (follows rules):

• Shows depreciation ✅
• Accounts for bad debts ✅
• Values inventory correctly ✅
• Actual profit: ₹7 Lakhs

Company B (no rules):

• Ignores depreciation ❌
• Doesn't account for bad debts ❌
• Overvalues inventory ❌
• Claims profit: ₹10 Lakhs (inflated!)

Investor confused: Which company is really profitable?

Solution: Accounting Standards ensure both follow SAME rules!

Objectives of Accounting Standards

Who Issues Accounting Standards?

In India 🇮🇳

• ICAI (Institute of Chartered Accountants of India)
• Issues: AS (Accounting Standards) 1-29
• Applicable to: Companies, partnerships, LLPs

Internationally 🌍

• IASB (International Accounting Standards Board)
• Issues: IFRS (International Financial Reporting Standards)
• Used by: 140+ countries

Convergence

India is moving towards Ind AS (converged with IFRS) for large companies.

Key Accounting Standards (Examples)

AS 1 – Disclosure of Accounting Policies

• Must disclose which policies you follow
• Example: "We use FIFO method for inventory valuation"

AS 10 – Property, Plant & Equipment

• How to value fixed assets
• When to depreciate

AS 22 – Taxes on Income

• How to account for income tax

Real-Life Impact: Satyam Scam

What Happened: Satyam inflated profits by ₹7,000+ Crores by NOT following accounting standards.

Violations:

• Fake cash balances (violated AS on cash statements)
• Fictitious revenue (violated revenue recognition standards)
• False interest income

Result: Company collapsed, investors lost billions.

Lesson: Standards exist to prevent fraud!

Benefits of Accounting Standards

For Companies:

• Clearer financial reporting
• Better decision-making
• Easier audits

For Investors:

• Can compare Company A vs Company B
• Trust the financial statements
• Make informed investment decisions

For Economy:

• Attracts foreign investment
• Reduces fraud
• Increases transparency

Compliance is Mandatory

Companies Act 2013: All companies MUST follow Accounting Standards.

Penalties for Non-Compliance:

• Fines up to ₹25 Lakhs
• Directors can be jailed (serious violations)
• Auditor's qualification in report

AS vs Ind AS vs IFRS

7-Day Action Plan

Day 1: Google "ICAI Accounting Standards" and see the official list (AS 1-29).
Day 2: Read AS 1 summary (Disclosure of Accounting Policies) from ICAI website.
Day 3: Pick any company annual report (Reliance, TCS). See "Accounting Policies" section - they mention which AS they follow!
Day 4: Understand why standards prevent fraud - read about one accounting scandal.
Day 5: Compare: If Company A uses FIFO and Company B uses Weighted Average for inventory, can you compare them directly? (No!)
Day 6: Learn 5 important AS numbers and what they cover (listed in next lesson).
Day 7: Appreciate that standards protect YOU as an investor/creditor!

Quiz

💡 Final Wisdom: "Accounting Standards are like traffic rules. They may seem restrictive, but they prevent crashes and ensure everyone reaches their destination safely. Follow them, and your financial statements will be trusted worldwide!"