What is an Accounting Standard?

Accounting standards are the practices which make financial information uniform and normalized between various businesses and accounting firms. Accounting standards constitute what is known as GAAP: Generally Accepted Accounting Principles.

These may apply to how revenue is recognized, how assets are classified, acceptable methods of depreciating assets, and so on. Some of these are based on IRS opinions and the jurisprudence of the law, some are just industry best-practices that are widely used.

Outside of the US, businesses are likely to use International Reporting Financial Standards (IRFS), which is an international version of GAAP. There are laws that require GAAP and IRFS for certain kinds of businesses and reporting.

Clear and transparent accounting regulations and practices are essential to the efficient flow of a free market. It makes it much more difficult for companies to cover up large debts or losses. It has been said that the Asian financial crisis of the late 1990s was partially caused by a lack of clear and standardized accounting practices.

It allows auditors and regulators to efficiently review books and records, often by simply importing a company’s accounting files on a standard accounting software. This also allows credit ratings institutions to have clear and standardized methods of giving investors and consumers an accurate picture of the financial state of a company or issuer of securities.