Accounting standard facts for kids

Accounting standards are like a special rulebook that companies follow when they share how they are doing financially. Imagine playing a game where everyone makes up their own rules – it would be super confusing! Accounting standards make sure all companies play by the same rules. This helps people understand and compare different companies easily.

Bigger companies usually follow very strict rules. Smaller businesses might use simpler rules. They also follow any special rules their lenders (like banks) or owners ask for.

Some businesses track money simply. They use the cash method of accounting. This means they record money only when it actually comes in or goes out. But most larger companies use something called the accrual basis. This is a key idea in accounting. With the accrual basis, companies record money when it's earned or when an expense happens. This is true even if the money hasn't physically changed hands yet. For example, if a company sells something on credit, they record the sale right away. They don't wait until the customer pays.

Accounting standards explain in detail:

• What income and expenses need to be recorded.
• How financial reports should look.
• What extra information companies need to share.

These rules also help identify the exact company that is reporting. They check if the company is expected to keep operating (called a "going concern"). They also say what currency to use and set the time periods for reporting. This could be a year or a quarter (three months).

Even governments use these standards! In 2020, about 30% of governments surveyed used accrual accounting. This is different from just tracking cash.

Challenges with Accounting Rules

Even though accounting standards are very helpful, they have some challenges:

• Can be strict: They can be very specific. This might not fit every unique situation perfectly.
• Takes time to create: It takes a lot of effort and time for experts to develop these rules.
• Difficult choices: Sometimes there are different ways to record something. Choosing the best one can be tricky.
• Limited scope: They might not cover every single financial situation.

In the early 2000s, there were big problems with how some huge companies recorded their money. Companies like Worldcom and Enron had serious issues. These cases showed that even with all these rules, big mistakes can happen. Sometimes even outside auditors (people who check the company's books) can miss them.

Benefits of Clear Accounting Rules

When countries don't have clear accounting rules, it can make it harder for businesses to work there. For example, the financial crisis in Asia in the late 1990s was partly due to a lack of detailed accounting standards. Some very large companies in Asian countries were able to use weak rules to hide huge debts and losses. This eventually caused a big financial problem for the entire region.

Having clear and open accounting standards helps everyone trust the financial information. This makes it easier to do business and invest.

Accounting Rules Around the World

One very important set of accounting rules used globally is the:

• International Financial Reporting Standards (IFRS)

Many countries use IFRS completely or in large part. If a company from outside the U.S. wants to report its finances in the U.S., it can often use this widely accepted IFRS format.

Different Rules by Country

While IFRS is popular, many countries also have their own specific accounting rules:

• Canada – Generally Accepted Accounting Principles (GAAP)
• China – Chinese Accounting Standards (Zhōngguó qǐyè kuàijì zhǔnzé)
• France – Generally Accepted Accounting Practice (Plan Comptable Général)
• Germany – Generally Accepted Accounting Practice (Grundsätze ordnungsmäßiger Buchführung)
• India – Indian Accounting Standards (Ind AS)
• Italy – Principi contabili nazionali
• Luxembourg – Luxembourg Generally Accepted Accounting Principles (Lux GAAP)
• Nepal – Nepal Financial Reporting Standards
• Russia – Russian GAAP
• Sweden – BAS (accounting)
• Switzerland – Swiss GAAP FER (Fachempfehlungen zur Rechnungslegung)
• Turkey – Uniform Accounting Plan (Turkey)
• United Kingdom – Generally Accepted Accounting Practice (UK)
• United States – Generally Accepted Accounting Principles (United States) (U.S. GAAP). Companies based in the U.S. usually follow these rules. However, foreign companies that trade in the U.S. often use IFRS.

Global Effort for Standard Rules

Many countries are either using or moving towards the International Financial Reporting Standards (IFRS). These standards were created and are looked after by the International Accounting Standards Board. In some countries, regular companies might use local accounting rules. But larger companies or those listed on stock exchanges must follow IFRS. This helps make their financial reports comparable around the world.

For example, all listed and grouped companies in the European Union have had to use IFRS since 2005. Canada started using them in 2009, and Taiwan in 2013. Other countries are also adopting their own versions of IFRS.

In the United States, there's been talk about moving towards a single set of global accounting standards. IFRS is seen as the best option for this. However, the U.S. has been slower to fully adopt IFRS.

See also

In Spanish: Principios de contabilidad generalmente aceptados para niños

• Constant item purchasing power accounting
• Convention of consistency
• Philosophy of accounting
• Statutory accounting principles for insurance companies in the US