The accounting standard is a compilation of principles, rules, and regulations used for performing accounting procedures. These were established to ensure that companies, especially publicly traded ones, maintain ethical practices when reporting their financial statements. Ethics in accounting are highly important for many reasons. If a company reports an inflated income or deflated expenses or liabilities, then investors and creditors cannot make wise decisions regarding a company’s risks.
To ensure that businesses follow the accounting standard, the Financial Accounting Standards Board (FASB) was established to set forth certain principles and to enforce them. Accounting information should be comparable in nature, viable, and timely. This means that one can easily compare financial statements from one time period with those of another, and that the information reported is accurate and reliable. Accountants use various financial statements to keep records of transactions in order to achieve these goals.
Another part of the accounting standard discusses the accountants or preparers who work for a company preparing financial statements. These people should not have an income that is directly related to the performance of their employer. For example, an accountant should not accept payment based on number of sales or income for the company. This prevents unethical behavior, such as inflating a business’s income in order to raise one’s own salary.
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Financial statements, like income sheets and balance sheets, should be kept current and all errors should be figured out before the end of each accounting period. An accounting period varies based on the company but can be divided into months, quarters, or a full year. Very few companies report for more than one year at a time. In addition, a year in accounting is not necessarily January through December. Companies use what is known as a fiscal year, which is any consecutive 52 week period.
Businesses are also obligated by the accounting standard to report debts and expenses. A company’s debt ratio equals the total liabilities divided by a company’s total assets, and it helps investors and lenders determine how well a company is able to pay its debts. Liabilities are claims that creditors have against a company’s assets, and assets are the claims an owner or owners of the company have on cash, property, buildings, or land.
All of these items must be recorded and determined according to the accounting standard to allow those outside the company to make wise decisions on investments. Liabilities must be reported along with all assets and revenue and monthly expenses like rent or utilities. If a company fails to report income or liabilities to the appropriate officials, such as for tax purposes, it can be held responsible for any indiscretion through legal action, repossessions, or auctions.