Businesses experience a variety of financial transactions as they work to meet customer demands. These include paying bills, receiving payments or borrowing money. Accountants record these transactions in the financial records. The Financial Accounting Standards Board, or FASB, creates accounting standards that outline the proper method for recording various transactions, such as installment sales or pension liability. Several advantages and disadvantages exist regarding the use of accounting standards.
Ease of Understanding
One advantage of using accounting standards involves the ease of understanding the financial statements. The accounting standards published by the FASB represent the required processes for businesses to follow. Financial statement users expect companies to follow the published accounting standards when creating financial statements. These users rely on the assumptions set forth in the accounting standards when interpreting the results reported. The users interpret the financial statements of different companies using the same assumptions. Once the users understand these assumptions, they use this knowledge when reading any financial statement.
Another advantage of using accounting standards concerns the guidance provided to accountants. When financial reporting issues arise, the accountant may refer to the published accounting standard to determine how to record the event. These issues include new accounting transactions arising from technology, such as Internet sales, or new actions incorporated by the company, such as changes in pension plans. The FASB incorporates the needs of financial statement users as well as company feedback when creating accounting standards. This process allows the accountant to trust that the guidance provided through the accounting standard passed the rigorous process of ensuring that it meets everyone’s needs.
A disadvantage of using accounting standards involves a sometimes inflexible framework the accountant must comply with. Each company faces different experiences. The accountant must make the company’s unique experiences fit into the guidelines of the published accounting standards. For example, an accountant can mark down the value of inventory, but is not allowed to mark it up. This can lead to an understated ending inventory value on a balance sheet.
Cost to Comply
Another disadvantage of using accounting standards involves the costs for the company to comply with the standard. New accounting standards require the company to consider the requirements of the standard, what actions the company must take to implement the standard and what the cost will be. In many cases, the company must design new procedures, which requires a large financial investment that includes employee labor costs, system upgrades and employee training.