What is an 'Accounting Standard'
An accounting standard is a principle that guides and standardizes accounting practices. The Generally Accepted Accounting Principles (GAAP) is a group of accounting standards widely accepted as appropriate to the field of accounting necessary so financial statements are meaningful across a wide variety of businesses and industries. An accounting standard is a guideline for financial accounting, such as how a firm prepares and presents its business income, expenses, assets and liabilities, and may be in accordance to standards set by the International Accounting Standards Board (IASB).
BREAKING DOWN 'Accounting Standard'
Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities such as banks, investors and regulatory agencies rely on accounting standards to ensure relevant and accurate information is provided about the entity. Accounting standards relate to all aspects of an entity’s finances including assets, liabilities, revenue, expenditures and equity. Specific examples of an accounting standard include revenue recognition, asset classification, allowable methods for depreciation, what is considered depreciable, lease classifications and outstanding share measurement.
History of Accounting Standards
The first accounting standards were developed in the 1930s. They were established for public entities and included in multiple securities acts that followed the Great Depression. The initial regulations established were included in the Securities Act of 1933 and the Securities Exchange Act of 1934. These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.
Financial Statement Comparability
Accounting standards ensure the financial statements from multiple companies are comparable. This is because all entities follow the same rules. Without accounting standards, there is little consistency as to the reporting of financial information. Accounting standards make the financial statements credible and allow for more economic decisions based on accurate and concise information.
The American Institute of Certified Public Accountants (AICPA) developed, managed and enacted the first set of accounting standards. In 1973, these responsibilities were given to the Financial Accounting Standards Board (FASB). As of May 2016, the Financial Accounting Standards Board still maintains regulation and administration on accounting standards.
Generally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses International Reporting Financial Standards (IFRS). These standards are required to be used for multinational entities. Accounting standards have also been established by the Governmental Accounting Standards Board (GASB) for accounting principles for all state and local governments.