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Accounting standards are an essential part of ensuring that a business reports fair and consistent information regarding its financial health. Before “generally accepted accounting principles” (GAAP) were in place, each company formed their own standards, which proved challenging not only in comparing a company’s financial performance, but also in learning the rules of the various accounting standards.

While the policies and laws surrounding GAAP may seem daunting to an entry-level bookkeeper or accountant, these standards provide many advantages that can help you make better decisions.

Benefits of Accounting Standards

Accounting standards make it possible for corporate executives to make informed decisions based on accurate financial reporting, and they also serve as a benchmark for exposing improper and unsafe accounting practices. Additionally, GAAP even provides benefits to the general public, not just businesses.

“Standards are essential to the efficient functioning of the economy because investors and creditors rely heavily on credible, concise, and understandable financial information,” says Ed Jenkins, former chairman of the Financial Accounting Standards Board (FASB).

From a high-level perspective, the FASB says that accounting standards are beneficial because they provide:

  • A standardized approach to accounting information that allows market professionals to distinguish the differences among companies and equips them with the tools to make educated investment and lending decisions
  • Information that is crucial in maintaining a system of corporate governance
  • Information that is used to regulate contracts and government policies

With these benefits in mind, let’s take a look at how these standards are put into place.

Establishing Accounting Standards

The U.S. Securities and Exchange Commission (SEC) is the governing body that determines and regulates accounting standards for publicly traded companies. For authoritative support, the SEC sanctions the help of the FASB to establish accounting standards.

The FASB’s Role in Setting Standards

Created in 1973, the FASB is responsible for developing and improving financial accounting and reporting standards for nongovernmental organizations. The standard-setting process is available to the public in the FASB’s Rules of Procedure guidelines, and includes the following proceedings:

  1. The board identifies financial reporting problems found by stakeholders and decides whether to take on the issue.
  2. The FASB deliberates before drafting an “Exposure Draft.”
  3. A public meeting is held to discuss the Exposure Draft.
  4. Members review the provision in detail including letters, discussion notes, and any other relevant information.
  5. The board deliberates again, taking stakeholder input into consideration.
  6. The FASB releases an Accounting Standards Update and declares an amendment to the Accounting Standards Codification.

Understanding the benefits of accounting standards and how these policies are enacted ensures that bookkeepers and accountants make informed decision that adhere to GAAP. For more information about financial accounting standards, contact us today or give us a call at 503.498.6456.

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