In order to standardize accounting practices across the country and around the globe, various standards have been developed.
The standards ensure that financial statements from all businesses are reported fairly and accurately. They cover things such as the measurement of economic activity, when those measurements are to be made and recorded and the disclosures surrounding that activity. They also apply to the preparation and presentation of a company's financial statements.
Accounting is generally considered to be the process of keeping track of a businesses' finances by keeping track of its accounts payable, accounts receivable and other financial transactions – often with accounting software – accounting standards are the method by which companies are required to do this.
According to Quick MBA, without standards, users of financial statements would need to learn the accounting rules of each company, making comparisons between companies extremely difficult.
Accounting standards were first developed in in the early 1930s following the Great Depression. The first standards, designed for all publicly traded companies, were part of the Securities Act of 1933 and the Securities Exchange Act of 1934.
In the United States, the standards were first developed and overseen by the American Institute of Certified Public Accountants. In 1973, those powers were transferred to the Financial Accounting Standards Board (FASB), which continues to administer them today.
Accountants are bound by different sets of standards depending on the type of business and where it is located. They include:
- Generally Accepted Accounting Principles: Developed by the FASB, the GAAP are used by most publicly traded and private companies in the United States. Among the items covered by the GAAP are revenue recognition, balance sheet item classification and outstanding share measurements.
- International Financial Reporting Standards: Developed by the International Accounting Standards Board, the IRFS are designed to eliminate disparities in financial reporting documents for businesses that operate globally.
- Government Standards: The Governmental Accounting Standards Board has developed its own generally accepted accounting principles for all state and local government accounting purposes.
According to the FASB, the standards are important to the efficient functioning of the economy because economic decisions about the allocation of resources rely heavily on credible, concise and understandable financial information.