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The importance of following accounting standards

The concept of accounting standards

What makes the evaluation of financial statements across countries difficult?
The principles, standards, and procedures that define the basis of financial accounting are known as accounting standards. Accounting standards consist of generally accepted accounting principles that are used to prepare financial statements and aim to improve the transparency of financial reports in all countries that follow these standards. Accounting standards include All financial aspects: from assets, liabilities, revenues, expenses and equity, and these standards vary around the world, making the evaluation of financial statements across countries difficult, and publicly traded companies usually follow the most stringent standards, while small and medium companies follow simpler standards, so these Accounting standards give businesses some kind of consistency in their business processes that include accounting, financial management and financial statements. Accounting standards are the way companies keep an overview of their financial resources, organize accounting processes and maintain financial documents.

The importance of following accounting standards

How did the repercussions of the Great Depression necessitate the adoption of accounting standards?
The importance of following accounting standards
The importance of following accounting standards

Accounting standards help investors and business owners evaluate their performance by following rules that are consistent with international financial reporting standards, as companies can work to falsify their numbers if they do not follow accounting standards, and these standards also enable governments to increase the ability of governments to track business and know the extent The quality of money management and spending, as the origins of these standards are due to the repercussions of the Great Depression in the thirties of the last century, which led to the establishment of the Securities and Exchange Commission and the adoption of accounting standards, as these standards help governments, investors and government agencies to make important decisions related to accounting information, accounting standards are not a phrase From one set of rules used by different parties, but these standards differ according to the financial needs and operations of companies, and the categories that use accounting standards are classified into the following:
  • Private and public companies: Accountants in public and private companies follow generally accepted accounting principles that were established by the Financial Accounting Standards Board, and these principles are often required to follow these principles from the Securities and Exchange Traded and regulated companies, while private companies follow these principles in pursuit of By obtaining the convenience of internal management, since these principles include revenue recognition and classification of balance sheet items.
  • International companies: A business can have a global reach in multiple countries, so these global companies work to follow the International Financial Reporting Standards (IFRS), which was developed by the International Accounting Standards Board, with the aim of providing financial information that can be easily compared to any A world-wide company.
  • Government: State and local bodies use government standards set by the Government Accounting Standards Board (GASB).
Accounting standards work to determine how economic events can be identified, measured and presented, so external entities such as banks, investors and regulatory bodies work to follow accounting standards in order to provide information related to these entities in a way that ensures transparency in the preparation of financial reports, and the non-use of these accounting standards increases It is difficult to do business in it, for example: the Asian financial collapse that occurred in the late nineties was a result of the lack of clear accounting standards, which worked to exploit some large companies to use these weak standards in order to cover their debts and large losses, which resulted in the occurrence of A major financial crisis in some Asian countries, and accordingly the importance of following accounting standards stems as follows:

Ease of comparison

Companies’ adoption of the same accounting principles is one of the things that facilitates the comparison between companies, for example: if one company follows the last-in, first-out method in valuing inventory, while the other company follows the first-in first-out method, then the process of comparing these two companies is Not useful, as comparisons can be useful when companies use the same methods for valuing inventory.

Retention of proprietary rights

Accounting standards contribute to clarifying the property rights associated with all users of accounting information, including creditors, investors, and shareholders. In accounting practices that are useful to accounting users.

Improve the reliability of financial statements

Many users of the information they obtain from accountants make various decisions according to the information contained in the financial statements, as these financial statements work to show a true picture of the financial situation, which gives users reliability in this information, as financial statements follow accounting standards such as disclosure standards facilitating Users should use these financial statements easily, as it contributes to the possibility of comparing the financial statements during different years, which facilitates the decision-making process.

Simplify accounting information

Accounting standards contribute to giving users the information they need without using data that misleads them. They help make financial statements simple for everyone, such as showing cash flows in terms of operating activities, investing activities, and financing activities.

Fraud Prevention

Accounting standards prevent fraud and data manipulation by management by using accounting standards that reduce fraud in accounting data.

Customer assistance

Accounting standards clarify the terms and conditions necessary for accounting policies and practices by using codes and guidelines that serve to interpret all items that appear in the financial statements, and this in turn makes these terms, policies and guidelines the basis for the audit of accounts.

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