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Different Standards of Accounting and the Purpose

Updated: Feb 6

There are several different standards of accounting, each serving different purposes and contexts within an specific organizations. Some of the most common methods of accounting standards include:

  1. Cost Accounting: Cost accounting focuses on analyzing and controlling the costs associated with producing goods or services within a company. It involves tracking and allocating costs to specific products, departments, or activities to facilitate decision-making and cost control.

  2. Financial Accounting: Financial accounting focuses on reporting the financial performance and position of a company to external stakeholders, such as investors, creditors, regulators, and the general public. It involves preparing financial statements, such as the balance sheet, income statement, and statement of cash flows, in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

  3. Managerial Accounting: Managerial accounting (or management accounting) focuses on providing internal management with relevant financial and non-financial information to support planning, decision-making, and control within an organization. It involves analyzing financial data, preparing budgets, forecasts, and variance analyses, and providing insights and recommendations to help managers make strategic business decisions.

  4. Hybrid Methods: Some organizations may use a combination of different accounting methods or develop customized accounting systems tailored to their specific needs and circumstances.

These are just a few examples of the different standards of accounting used by organizations. The choice of accounting method depends on factors such as the nature of the business, regulatory requirements, financial reporting standards, and management preferences.

Who sets the accounting standards:

The Financial Accounting Standards Board (FASB) is an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States. It follows generally accepted accounting principles (GAAP). The FASB, formed in 1973 to succeed the Accounting Principles Board, is based in Norwalk, Connecticut. Here are some key points about the FASB:

  1. Role: The FASB sets accounting rules for public and private companies as well as nonprofits in the U.S. It has the authority to establish and interpret GAAP for these entities.

  2. Recognition: The Securities and Exchange Commission (SEC) recognizes the FASB as the accounting standard setter for public companies. Additionally, state accounting boards, the American Institute of Certified Public Accountants (AICPA), and other organizations in the field also recognize the FASB.

  3. Collaboration: In recent years, the FASB has been working with the International Accounting Standards Board (IASB) to establish compatible accounting standards worldwide.

  4. Structure: The FASB is part of a larger nonprofit group that includes the Financial Accounting Foundation (FAF), the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC).

  5. Mission: Collectively, these organizations aim to improve nonprofit financial accounting and reporting standards, making the information useful to investors and other users of financial reports. They also educate stakeholders on effective implementation of the standards.

  6. Board Members: The FASB is governed by seven full-time board members who sever their ties to the companies or organizations they work for before joining the board. These members are appointed by the FAF’s board of trustees for five-year terms and may serve for up to 10 years.

In summary, the FASB plays a crucial role in shaping accounting standards, ensuring transparency and consistency in financial reporting across various entities in the U.S.

Different Standards of Accounting and the Purpose
Different Standards of Accounting and the Purpose