In all types of businesses, accounting is not merely the recording and the keeping track of a business’ finances, but accounting must also adhere to a certain set of accounting standards.
Basically, accounting standards, which are generally the accepted principles, guidelines and procedures that standardize accounting practices with regards to the recording and reporting of business transactions across the country and around the globe, ensure that there is a reasonable degree of uniformity in the accounting policies throughout the world with respect to collection and presentation of accounting information; thus, ensuring that accounting decisions are made in a unified and reasonable way, as well as ensuring that the process of accounting, the keeping track of a businesses’ finances, the interpretation of these numbers and the wherewithal to place them in the proper context, which are at the heart of accounting, are done and reported fairly and accurately.
Accounting standards do not only safeguard investors and creditors, but also helps the businesses themselves, providing them with accurate, relevant, useful information that would help them in making well-informed investment decisions as well as help them in facilitating reasonable assessments of performance and assess their businesses’ growth and evaluate the success of their strategies.
Specifically, accounting standards ultimately ensure that business entities record and report financial information in a way that most fairly and clearly represents the current financial standing of the operation. This, thus, provides both investors and the entity itself with access to the most relevant information in the most reasonable way possible, helping them make well-informed decisions.
Designed to enforce transparency, accounting standards therefore ensure that businesses lean in the direction of openness when deciding on how to provide information to organization observers by limiting the freedom and flexibility of businesses in using clever accounting to move items around or even to hide them. Therefore, both consumers and investors are protected from the risk of fraud by the business. This is because businesses work to ensure compliance with regulatory accounting standards to avoid the significant legal costs or criminal penalties associated with accounting inconsistencies. Also, accounting standards improve the efficiency of markets as national regulators use these standards to help provide their nations’ enterprises with access to foreign markets and capital.
With these, the interests of investors are therefore protected as well as it ensures them that their investment is still substantiated. Basically, educated investors usually need relevant, useful information to make their investment decisions as well as ensure them that the money they put into a company will result in a return on investment and build shareholder value, and that is what “high quality accounting standards deliver”.
By practicing proper accounting standards, one can therefore provide confidence to a greater number of investors, both locally and globally, that their investments will be responsibly managed and protected by them. This would create the business’ credibility, which in turn could mean a greater investor interest and further investment in the company.
Finally and most significantly for businesses, by using consistent accounting standards, this is one way that business managers will be able to reasonably and accurately compare their performance. This is because different companies use the same accounting standards, and the businesses that opt to do so will be able to contrast their growth with that of competitors. This, thereby, helps business managers and investors identify strengths and weaknesses.
In addition, practicing proper accounting standards will ensure that financial statements can be reasonably compared over time. By comparing current and past performances, managers will be able to assess and evaluate their businesses’ growth and the success of their strategies.
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