Advanced Accounting · Introduction to Accounting Standards

Meaning and Objectives of Accounting Standards

Updated 4 October 2026 · Fact-checked

Accounting Standards (AS) are written policy documents, formulated by ICAI through its Accounting Standards Board and, for companies, notified by the Central Government under the Companies Act, 2013. They prescribe how to recognise, measure, present and disclose transactions. To answer, define the term, state objectives, then give benefits and limitations.

Understand Meaning and Objectives of Accounting Standards

Accounting is full of choices. A business can value stock in different ways, charge depreciation by different methods, or recognise revenue at different times. If every business chose freely, two companies in the same trade could show very different profits for the same facts.

Accounting Standards are written rules and guidelines that narrow these choices. They tell you what to recognise, how to measure it, how to present it and what to disclose. They are issued so that financial statements follow common, accepted practice.

In India, ICAI formulates the standards through its Accounting Standards Board. For companies, the Central Government notifies Accounting Standards under section 133 of the Companies Act, 2013. It does so on the recommendation of the National Advisory Committee on Accounting Standards (NACAS), which is constituted under section 132, after consulting ICAI. Each standard is numbered, such as AS 1 or AS 2, and covers one area.

The main objectives are:

To harmonise the different accounting policies and practices in use.
To standardise and reduce alternative treatments, so statements are comparable.
To improve reliability and credibility of financial statements.
To ensure adequate disclosure so users can understand the numbers.
To give auditors a clear benchmark against which to report.

Standards are not perfect. They cannot cover every situation, they involve judgement, and they must work within the law. Know both sides: benefits and limitations.

How to solve Meaning and Objectives of Accounting Standards questions

Theory questions on this topic are usually 'explain', 'state objectives', 'discuss benefits' or 'state limitations'. Use one structure for all of them.

1Read the verb. 'Define' needs a short definition. 'Discuss' needs points with a line of explanation each.
2Open with a one or two line definition of Accounting Standards.
3State why they are needed: many alternative policies, need for comparability, need for reliable disclosure.
4List the points the question asks for (objectives, benefits or limitations) as separate numbered points.
5Add one short explanation line to each point so it is not just a keyword.
6Close with a one line conclusion linking standards to uniformity and reliability of financial statements.

Quickest way: Definition, Need, Points, Close

When to use it: Use for any written theory question on this topic, and for MCQs that ask which statement is true or false about standards.

Write a one line definition first to secure the opening mark.
Use numbered points, each in one line with a reason.
For limitations, always mention judgement, alternatives still allowed, and legal override.
For MCQs, reject options with words like 'always', 'eliminate completely' or 'replace law'. Standards reduce, not remove, alternatives and cannot override the law.
Check the answer has at least as many points as marks.

Common mistakes in Meaning and Objectives of Accounting Standards

Saying standards eliminate all alternative treatments.
Students remember 'uniformity' and stretch it.
Fix: Write that standards reduce or narrow alternatives. Some choices remain, for example in cost formulas.
Confusing objectives with benefits.
The points sound similar.
Fix: Objectives are what standards aim to do, such as harmonisation. Benefits are what users gain, such as comparability and credibility. Keep two separate lists.
Writing only keywords with no explanation.
Students rush in a three hour paper.
Fix: Add one short line to each point saying why it matters.
Claiming standards override the law.
Standards feel authoritative.
Fix: State that where law and a standard conflict, the law prevails. Standards work within the legal framework.
Omitting limitations or giving only one.
Students focus on positives.
Fix: Prepare three limitations: judgement and flexibility remain, standards cannot cover every case, and they may lag behind business changes.

Worked examples

Example 1

What are Accounting Standards? State their objectives. (5 marks)

Show the solution

Define: Accounting Standards are written policy documents that prescribe the recognition, measurement, presentation and disclosure of items in financial statements.
Objective 1: To harmonise the varied accounting policies and practices in use.
Objective 2: To reduce alternative treatments so statements of different entities are comparable.
Objective 3: To improve the reliability and credibility of financial statements.
Objective 4: To ensure adequate disclosure so users can understand the figures.
Objective 5: To give auditors a benchmark for checking compliance.

Answer: Accounting Standards are authoritative written rules for recognising, measuring, presenting and disclosing items in financial statements. Their objectives are harmonisation of policies, comparability, reliability, adequate disclosure and a benchmark for auditors.

Example 2

Discuss the limitations of Accounting Standards. (4 marks)

Show the solution

Alternatives remain: standards reduce but do not remove choices, so some differences between entities persist.
Judgement is needed: estimates and policy selection still depend on management, so bias is possible.
Coverage is limited: standards cannot address every transaction, especially new ones, and may lag behind business practice.
Law prevails: standards operate within the law, so where a statute conflicts, the statute is followed.

Answer: The limitations are residual alternatives, dependence on judgement, incomplete coverage and lag behind new transactions, and subordination to law. Standards improve comparability but cannot make statements fully uniform.

Exam tips

Prepare short lists of objectives, benefits and limitations, each with three to five points.
Use numbered points with one explanatory line; this earns more than a paragraph.
In MCQs, watch for absolute words like 'all' or 'eliminate'. They are usually wrong.
Link the topic to later standards by naming one example, such as AS 2 for inventories, to show applied understanding.
Cite section 133 of the Companies Act, 2013 as the basis for notifying Accounting Standards for companies, and be accurate with any other section numbers or dates you quote.

Practice questions from Introduction to Accounting Standards

Meaning and Objectives of Accounting Standards in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Meaning and Objectives of Accounting Standards: frequently asked questions

What are Accounting Standards in simple words?

They are written rules that tell businesses how to record, measure, present and disclose transactions. They make financial statements of different entities easier to compare and trust.

Why are Accounting Standards needed in India?

Without them, entities could choose very different policies for the same transaction. Standards harmonise practice, improve disclosure and give auditors and users a common benchmark.

What are the main limitations of Accounting Standards?

They cannot remove all alternatives or judgement, cannot cover every transaction, may lag behind new business practices, and must follow the law where there is a conflict.

Do Accounting Standards override the Companies Act?

No. Standards work within the legal framework. If a law and a standard conflict, the law prevails.