Loading the player...

What is an 'Accounting Standard'

An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting Principles (GAAP) form the set of accounting standards widely accepted as appropriate accounting for preparing financial statements. International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board (IASB) and serve as the guideline for non-U.S. GAAP companies reporting financial statements.

BREAKING DOWN 'Accounting Standard'

Accounting standards relate to all aspects of an entity’s finances including assets, liabilities, revenue, expenses and shareholders' 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 and Purpose

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. Accounting standards have also been established by the Governmental Accounting Standards Board (GASB) for accounting principles for all state and local governments.

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. These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.

U.S. GAAP Accounting Standards

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). The Securities and Exchange Commission (SEC) requires all listed companies to adhere to U.S. GAAP accounting standards in the preparation of their financial statements to be listed on a U.S. securities exchange. Accounting standards ensure the financial statements from multiple companies are comparable. Because all entities follow the same rules, accounting standards make the financial statements credible and allow for more economic decisions based on accurate and concise information.

IFRS 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 Financial Reporting Standards (IFRS). These standards are required to be used for multinational entities. The International Accounting Standards Board (IASB) establishes and interprets the international communities' accounting standards when preparing financial statements.

RELATED TERMS
  1. Accounting Principles

    Accounting principles are the rules and guidelines that companies ...
  2. Financial Accounting Foundation ...

    The Financial Accounting Foundation is an independent, private-sector ...
  3. Accounting Interpretation

    Accounting interpretation is a statement, issued by accounting ...
  4. Accounting Theory

    Assumptions, methodologies and frameworks used in the study and ...
  5. Accounting Principles Board - APB

    The Accounting Principles Board was the former authoritative ...
  6. Statement of Financial Accounting ...

    Statements of Financial Accounting Standards were published by ...
Related Articles
  1. Investing

    Gauging the impact of combining GAAP and IFRS

    The convergence of accounting standards is changing the attitudes of CPAs and CFOs toward harmonization of international accounting.
  2. Investing

    GAAP

    Learn more about the generally accepted accounting principles, standards and procedures that companies use to compile their financial statements.
  3. Managing Wealth

    Accounting Research Manager: Career Path & Qualifications

    Discover the basic responsibilities of an accounting research manager, the path this career usually takes and the qualifications needed for this career.
  4. Investing

    What is Accounting?

    Accounting is the recording of financial transactions of a business or organization. It also includes the process of summarizing, analyzing and reporting these transactions in financial statements.
  5. Investing

    International Reporting Standards Gain Global Recognition

    Comparing financial numbers from corporations in different countries is possible with the adoption of IFRS.
  6. Investing

    International Financial Reporting Standards

    Learn about the purpose of the IFRS, as well as its benefits, goals, and fundamental difference from the U.S. GAAP.
  7. Personal Finance

    Career advice: financial analyst versus accountant

    Read an in-depth comparison between a career as a financial analyst and a career as an accountant, including how to determine which is best for you.
RELATED FAQS
  1. Do all countries follow the same GAAP?

    Learn about GAAP and IFRS accounting standards, and understand the difficulties in having a basic set of accounting principles ... Read Answer >>
  2. What are some of the basic Generally Accepted Accounting Principles?

    Learn more about generally accepted accounting principles determined by the Financial Accounting Standards Board, including ... Read Answer >>
  3. What does financial accounting focus on?

    Learn the main tenets of financial accounting, the guidelines by which it is governed and how outsiders use it to gauge a ... Read Answer >>
  4. How does the Financial Accounting Standards Board (FASB) establish accounting protocol?

    Find out how the Financial Accounting Standards Board or FASB, identifies possible financial reporting issues and determines ... Read Answer >>
  5. What is cost accounting?

    Learn about the main benefits of cost accounting systems, how they are different from financial accounting and why they are ... Read Answer >>
  6. How does financial accounting help decision making?

    Read a brief overview of some areas where financial accounting helps in decision making for investors, lending institutions ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center