What is an Accounting Standard?

An accounting standard is a document issued by a rule-setting body, stating the manner in which accounting transactions are to be recorded and reported. Accounting standards cover a broad range of topics, including general principles, presentation, assets, liabilities, equity, revenue, expenses, broad transactions, and industry-specific. The range of topics covered is constantly expanding, as new business practices and industries create new scenarios for which rules must be developed. When an organization follows accounting standards, its financial statements can then be audited by an outside auditor, which is a standard requirement by lenders, creditors, and investors.

Advantages of Accounting Standards

There are a number of essential advantages associated with using accounting standards, which are as follows:

Reporting consistency. Accounting standards force organizations to account for and report transactions in the same way, so that their overall results can be compared. This is massively useful for investors, who want to determine the value of the businesses in which they are investing. Consistent reporting is also useful for lenders and creditors, who want reliable financial statements that they can use as the basis for credit analyses.
Investor confidence. Investors are more likely to trust the financial reports of those businesses that adhere to a set of accounting standards. When this is the case, investors are more likely to invest in and lend to these organizations.
Auditable records. Organizations that follow a set of accounting standards will produce accounting records that are much easier to audit. This makes it easier for outside auditors to conduct an audit in a reasonably cost-effective manner.
Basis for decision-making. It is easier for the management team to understanding the financial results and financial position of a business when it is using accounting standards, which allows the team to make better-informed decisions about how to operate the business.

Who Issues Accounting Standards?

The entities that most commonly issue accounting standards are the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Representatives from these organizations meet regularly to discuss how to coordinate their standard-setting activities. This has resulted in some essentially identical standards being issued by the two organizations - though there have been differences in some areas.