Author
LoansJagat Team
Read Time
6 Min
25 Jul 2025
What Are Accounting Standards? Purpose, Types & Framework
Accounting standards are written policies or principles that guide companies in recording and presenting their financial statements.
XYZ Company sells mobile accessories and operates in-store. However, the ABC Company sells the same items online. Both businesses are similar, yet their financial reports look completely different.
XYZ uses the historical cost method. This means it records its store property at the original purchase price of ₹50 lakh (bought 5 years ago). Meanwhile, ABC uses the fair value method and shows its rented warehouse and online systems at the current market value, which totals ₹80 lakh.
This ₹30 lakh difference creates confusion. An investor comparing these companies may assume ABC is doing better financially, even though their actual operations and profits may be similar.
This inconsistency makes it difficult for anyone (investors, auditors, and banks) to understand which company is doing better. That is where accounting standards help by setting rules that everyone must follow.
Purpose Of Accounting Standards
These standards are created not just for record-keeping. But to ensure clarity and consistency for all users of financial reports.
From the above-mentioned table you can see the key purpose of accounting standards. You can see how accounting standards bring clarity, uniformity, and trust to the financial statements of all businesses.
Types Of Accounting Standards
You can group accounting standards based on the nature of the financial aspect they deal with.
1. Disclosure Standards
These define what additional information should be shared in notes or supporting schedules.
Example:
- AS 1 – Accounting Policies
- Ind AS 24 – Related Party Disclosures
2. Measurement Standards
These guide how assets, liabilities, and revenues are valued or calculated.
Example:
- AS 2 – Valuation of Inventories
- Ind AS 16 – Property, Plant, and Equipment
3. Presentation Standards
These outline the format and layout used in financial statements.
Example:
- Ind AS 1 – Presentation of Financial Statements
4. Recognition Standards
These controls determine the recording schedule for assets, expenses, or income.
Example:
- Ind AS 115 – Revenue from Contracts with Customers
5. Special Purpose Standards
These are issued for unique or specific business events, such as mergers or the issuance of financial instruments.
Example:
- Ind AS 103 – Business Combinations
- Ind AS 109 – Financial Instruments
Common Accounting Standards And Their Areas
The following are some key accounting standards in use:
These are generally followed by firms not covered under the Ind AS requirements.
What Is Ind AS?
Ind AS (Indian Accounting Standards) is a newer set of standards, followed by listed and large companies. These are aligned with international rules to match global business practices.
The following are the main characteristics of Ind AS:
- Accrual System
- Fair Valuation
- Substance Over Form
- Mandatory Consolidation
The following are the key Indian accounting standards:
Recently, the ICAI announced a new accounting standard (Ind AS 118). It aims to improve financial reporting quality further.
Advantages Of Using Accounting Standards
If you have one set of rules, then it helps avoid bias, confusion, and reporting gaps.
Recently, NFRA stated its aim to align domestic standards with the best global practices. It will further strengthen financial governance.
AS Vs Ind AS
Ind AS has brought reporting closer to international norms, especially for global investors and partnerships.
Let’s look at the key differences between accounting standards and Indian accounting standards:
In February 2025, the IFRS Foundation released the third edition of its SME standards. It will help small businesses align with international best practices.
Framework For Financial Reporting
Companies follow a structured financial reporting framework to apply these standards correctly. It includes:
- Recognition: When to record a transaction.
- Measurement: At what value should it be recorded?
- Presentation: Where to show it in the financial statement.
- Disclosure: What notes and explanations are needed?
Example:
If your business receives a long-term loan, then you need to record the amount received. You need to show it as a liability. Also, you need to include repayment terms in the notes.
Implementation Challenges
The following are the challenges faced in the application:
To enhance accountability, the ICAI has released draft standards for LLPs. It aims to align their auditing and reporting practices with those of companies.
Conclusion
You might have understood by now that accounting standards are the foundation of financial discipline in any business. They help your business:
- Eliminate ambiguity
- Ensure truthful reporting
- Promote global comparability
With bodies like the ICAI and NFRA constantly improving the framework, your business is now better supported in its reporting practices.
With convergence to IFRS principles, companies are now more equipped to report fairly and confidently.
The size of your company does not matter; you need to follow the correct accounting standards.
FAQs
1. Are accounting standards updated?
Yes, they are revised to reflect new business realities and global changes.
2. What if a firm doesn’t follow the standards?
They may face audits, legal issues, or penalties.
3. Are accounting standards applicable to LLPs?
Yes, the ICAI has issued separate guidelines for LLPs.
4. Do all companies follow Ind AS?
Only listed and large firms. Others may follow AS or simplified standards.
About the Author
LoansJagat Team
We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?
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