Financial Accounting · Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS)

Accounting Standards: Meaning, Objectives and Need

Updated 10 October 2026 · Fact-checked

Accounting standards are written policy documents that set out how transactions and events must be recognised, measured, presented and disclosed in financial statements. In India, ICAI's Accounting Standards Board formulates them. They are needed to make financial statements consistent, comparable and reliable. To answer exam questions, define them, then give objectives, benefits and limitations.

Understand Accounting Standards: Meaning, Objectives and Need

Every business records transactions, but there is more than one acceptable way to treat many of them. One firm may value stock one way and another firm a different way. Without common rules, two companies with identical operations could report very different profits. Users such as investors, lenders and regulators could not compare them.

Accounting standards solve this. They are authoritative statements that lay down how items should be recognised, measured, presented and disclosed in financial statements. They narrow the range of alternative treatments and replace personal judgement with agreed rules wherever possible.

In India, standards are formulated by the Accounting Standards Board (ASB) of ICAI, so that ICAI can establish them. Per the Preface, the ASB takes into account the applicable laws, customs, usages and business environment prevailing in India. It also gives due consideration to International Financial Reporting Standards (IFRSs) issued by the IASB and tries to integrate them to the extent possible, in the light of conditions and practices in India. This is why Indian standards have moved towards global practice.

The Framework for the Preparation and Presentation of Financial Statements sits behind the standards. It states, for example, that financial statements are prepared on the accrual basis: effects of transactions are recognised when they occur, not when cash is received or paid. It helps preparers where no standard exists, helps the ASB develop new standards, and helps auditors judge whether statements conform to standards.

Standards do not apply identically to every company. Companies following Ind AS use those standards. Other companies follow the Accounting Standards (AS), and Small and Medium Sized Companies (SMCs) get certain exemptions and relaxations. Remember the idea first: standards exist to make reporting uniform, comparable and trustworthy.

Key rules to remember

Meaning of accounting standards: Accounting standards = written rules on recognition + measurement + presentation + disclosure; Use this as the core of any definition answer.
Objectives of the ASB (Preface, para 2.1): Suggest areas for new standards; formulate standards; adapt IFRSs; review and revise standards; give interpretations and guidance; take part with national and international bodies; The Preface also lists carrying out other functions relating to accounting and accounting standards.
Main function of the ASB (para 2.2): Formulate standards, taking into account applicable laws, customs, usages and business environment in India; Quote this when asked how Indian conditions shape standards.
Approach to IFRS (para 2.3): Give due consideration to IFRSs and integrate them to the extent possible, in light of Indian conditions and practices; Do not say India copies IFRS fully under the AS; the wording is 'to the extent possible'.
Small and Medium Sized Company (Rule 2(e), Companies (Accounting Standards) Rules, 2021): Not listed or in process of listing; not a bank, financial institution or insurance company; turnover (excluding other income) ≤ ₹250 crore; borrowings ≤ ₹50 crore at any time; not holding or subsidiary of a non-SMC; All five conditions must be met, tested as at the end of the relevant accounting period. Companies failing it are Non-SMCs.

How to solve Accounting Standards: Meaning, Objectives and Need questions

Questions on this topic are theory based. Use one structure for any of them.

1Read the verb: define, explain, state objectives, discuss need, list benefits, or give limitations.
2Open with a one-line definition: standards are written rules on recognition, measurement, presentation and disclosure.
3Link to the question's angle: need (uniformity, comparability, reliability), objectives (ASB functions) or benefits and limitations.
4Write points as short numbered lines, each with a one-line reason.
5Add the Indian context: ASB of ICAI, Indian laws and business environment, IFRS consideration.
6For the limitations question, give balance: rigid rules, alternatives still remain, judgement is needed, cost of compliance.
7Close with a one-line conclusion tying standards to reliable, comparable financial reporting.

Quickest way: Definition-Need-Benefit-Limit (D-N-B-L) outline

When to use it: Use for any short note or 5 to 7 mark theory answer when time is short.

D: write the one-line definition.
N: give three need points: comparability, uniformity, reliability.
B: give two or three benefits: user confidence, auditor guidance, reduced alternatives.
L: give two limitations: rigidity and continuing judgement.
Stop with a one-line conclusion. For MCQs, look for the option that names recognition, measurement, presentation and disclosure.

Common mistakes in Accounting Standards: Meaning, Objectives and Need

Writing that standards are laws passed by Parliament.
Students confuse standards with Acts because both are compulsory in practice.
Fix: Say standards are formulated by the ASB for ICAI, and companies follow them as notified under the Companies (Accounting Standards) Rules, 2021.
Saying the ASB copies IFRS entirely.
Students mix up the AS with the Ind AS convergence story.
Fix: Use the Preface wording: the ASB gives due consideration to IFRSs and integrates them to the extent possible, in light of Indian conditions.
Listing only benefits and forgetting limitations.
The word 'need' pushes students to write only positives.
Fix: Whenever the question mentions both, give a balanced split, even if limits get fewer lines.
Claiming standards remove all alternatives and judgement.
Students overstate the idea of uniformity.
Fix: Write that standards reduce alternatives but some choice and estimation remain.
Assuming every company follows the same standards and exemptions.
Applicability rules are skipped.
Fix: Remember Ind AS companies follow Ind AS, others follow AS, and SMCs get relaxations. For example, AS 17 Segment Reporting is not applicable to SMCs.
Treating SMC as just a small turnover test.
Students remember only the ₹250 crore figure.
Fix: Recall all five conditions, including listing status, type of entity, borrowings up to ₹50 crore and group status.

Worked examples

Example 1

Explain the meaning of accounting standards and state why they are needed.

Show the solution

Meaning: accounting standards are written policy documents that prescribe how transactions and events are recognised, measured, presented and disclosed in financial statements.
In India they are formulated by the Accounting Standards Board of ICAI, considering Indian laws, customs, usages and business environment.
Need 1: Comparability. Different firms using different treatments cannot be compared; standards give common rules.
Need 2: Reliability. Rules reduce manipulation and personal bias in reported profit and position.
Need 3: Reduced alternatives. Fewer permitted treatments give consistency across years and entities.
Need 4: Help to users and auditors. Investors, lenders and regulators can rely on statements, and auditors get a benchmark to judge conformity.

Answer: Accounting standards are authoritative written rules on recognition, measurement, presentation and disclosure. They are needed to make financial statements comparable, consistent and reliable for users, and to give auditors a clear benchmark.

Example 2

A company has never been listed, is not a bank, financial institution or insurance company, has turnover (excluding other income) of ₹180 crore and borrowings never above ₹40 crore in the previous accounting year, and is a subsidiary of a listed company. Is it an SMC under the Companies (Accounting Standards) Rules, 2021? Give reasons.

Show the solution

Check listing: not listed and not in process of listing. Condition (i) is met.
Check entity type: not a bank, financial institution or insurance company. Condition (ii) is met.
Check turnover: ₹180 crore does not exceed ₹250 crore. Condition (iii) is met.
Check borrowings: ₹40 crore does not exceed ₹50 crore. Condition (iv) is met.
Check group status: the parent is listed, so it is not an SMC. The company is a subsidiary of a non-SMC, so condition (v) fails.
All five conditions must be satisfied, so one failure is enough to disqualify.

Answer: The company is not an SMC. It fails condition (v) because its holding company is listed and so is a non-SMC. It is therefore a Non-SMC and cannot use SMC relaxations such as the AS 17 exemption.

Exam tips

Learn the definition in one line, then add Indian context (ASB, ICAI, IFRS consideration) to stand out.
For benefits and limitations questions, give both sides, numbered, with a reason for each point.
In MCQs, watch for traps like 'standards are issued by the Government' or 'all alternatives are removed'; both are wrong.
Memorise the five SMC conditions and the figures ₹250 crore turnover and ₹50 crore borrowings, because numerical applicability checks are easy marks.
Keep theory answers short and structured; use headings like Meaning, Need, Benefits, Limitations to earn step marks.

Practice questions from Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS)

Accounting Standards: Meaning, Objectives and Need in other exams

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

Accounting Standards: Meaning, Objectives and Need: frequently asked questions

What are accounting standards in simple words?

They are written rules that tell accountants how to record and report transactions in financial statements. They cover recognition, measurement, presentation and disclosure. Their aim is uniform and comparable reporting.

Who formulates accounting standards in India?

The Accounting Standards Board of ICAI formulates them so that ICAI can establish them. It considers Indian laws, customs, usages and business environment, and gives due consideration to IFRSs.

What are the limitations of accounting standards?

Standards can be rigid and cannot cover every situation. Some alternatives and estimates remain, so judgement is still needed. Compliance also costs time and effort, especially for smaller entities.

Do all companies follow the same accounting standards?

No. Companies following Ind AS apply those standards, while others follow the Accounting Standards. Small and Medium Sized Companies get certain exemptions and relaxations, such as no need to apply AS 17 Segment Reporting.