Accounting Standards: Meaning, Types, Applicability and Benefits

In summary

Accounting standards provide rules for how financial transactions are recognised, measured, presented, and disclosed. They help make financial information more consistent and comparable.

• Ind AS is based on IFRS and applies to specified classes of companies.
• Other companies follow Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021.
• ICAI issues Accounting Standards for entities other than companies.
• Applicability depends on the entity's type and applicable regulatory requirements.
• Standards cover areas such as revenue, assets, liabilities, and disclosures.
• Consistent reporting helps investors compare financial information across periods and companies.

The Bajaj Broking website provides access to mutual fund information, but accounting standards themselves are governed by the applicable legal and professional framework in India.

Accounting standards are rules and principles that guide how an entity records, measures, presents, and discloses financial transactions.

Without common accounting rules, two businesses could record similar transactions differently, making their financial statements difficult to compare. Standards establish a consistent basis for preparing financial information and help users understand what the reported numbers represent.

In India, the framework is not a single set of standards for every type of entity. There are Ind AS for specified companies, Accounting Standards notified for companies that are not required to follow Ind AS, and Accounting Standards issued by ICAI for entities other than companies.

These standards cover areas such as revenue recognition, inventory valuation, property and equipment, employee benefits, provisions, financial instruments, consolidation, and financial statement presentation.

Accounting standards improve the usefulness of financial information by providing a consistent framework for reporting.

They improve comparability

When companies follow applicable accounting requirements consistently, investors and other users can compare financial information across different periods and, where appropriate, across businesses.

This is particularly important when analysing financial statements because the reported figures form the basis for assessing profitability, liquidity, assets, liabilities, and cash flows.

They improve transparency

Accounting standards specify what information needs to be recognised and disclosed. This gives stakeholders greater visibility into an entity's financial position and performance.

They reduce inconsistent treatment

Similar transactions are generally subject to defined recognition and measurement requirements. This reduces the scope for materially different accounting treatment where the same standard applies.

They support financial analysis

Investors, lenders, management, and regulators use reported financial information to assess businesses. Consistent accounting makes this analysis more meaningful.

For example, an investor assessing a company's net worth needs to understand how the underlying assets and liabilities have been recognised and measured.

The applicable framework depends on the type of entity.

Indian Accounting Standards

Ind AS are Indian standards converged with IFRS. They apply to specified classes of companies under the Companies (Indian Accounting Standards) Rules, 2015, as amended. The framework is designed to improve comparability of financial reporting with international practices.

Accounting Standards for companies

Companies that are not required to follow Ind AS may be subject to Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021. The applicable requirements depend on the company and relevant exemptions or relaxations.

Accounting Standards for non-company entities

ICAI also prescribes Accounting Standards for entities other than companies. Non-company entities are classified into four levels for applicability purposes, with specified exemptions and relaxations for smaller entities.

This means you should not assume that every business in India follows exactly the same set of accounting requirements.

Different institutions have different roles in the accounting framework.

• ICAI: The Institute of Chartered Accountants of India develops Accounting Standards and provides professional guidance through its Accounting Standards Board. Its current resources include separate compendiums for Accounting Standards and Ind AS.
• MCA: The Ministry of Corporate Affairs notifies accounting standards and rules applicable to companies under the Companies Act framework.
• SEBI: SEBI's requirements are relevant to listed entities and regulated securities-market participants. For example, SEBI has prescribed accounting requirements for mutual fund schemes, including the transition to Ind AS for scheme financial statements from 1 April 2023.

The applicable accounting framework therefore depends on the entity and the regulatory requirements governing it.

Applicability is determined by factors such as the legal form of the entity, whether securities are listed, financial size, and the sector-specific regulatory framework.

For companies, Ind AS applies to specified classes under the Companies (Indian Accounting Standards) Rules. Other companies generally follow the Accounting Standards notified under the Companies (Accounting Standards) Rules, subject to the applicable requirements.

For non-company entities, ICAI uses a four-level classification. Level I entities follow the Accounting Standards in full, while Level II, Level III, and Level IV entities receive specified exemptions and relaxations.

Consider Meera, who owns a small non-company business. She cannot determine the applicable accounting requirements simply by looking at her turnover. She would first need to establish the entity's legal form and classification under the applicable ICAI framework. If the entity falls into a category with permitted exemptions, certain standards or disclosures may not apply in the same way as they would to a larger entity.

This is why businesses should check the applicable rules rather than assume that the standards followed by a listed company also apply to them.

Accounting standards address different parts of financial reporting.

They can cover:

• Revenue: When and how revenue should be recognised.
• Assets: How assets are recognised, measured, depreciated, or impaired.
• Liabilities: How obligations and certain provisions are recognised and measured.
• Financial instruments: How specified financial assets and liabilities are classified and measured under the applicable framework.
• Employee benefits: How obligations relating to employees are accounted for.
• Consolidation: How the financial information of related entities may be combined.
• Disclosures: What additional information should accompany financial statements.
• Presentation: How financial statements should be structured and presented.

The exact requirements depend on the applicable standard and the entity concerned.

Non-compliance can affect the reliability of financial statements and may lead to regulatory, legal, or professional consequences, depending on the entity and the nature of the breach.

It can also affect investors and lenders because they may rely on financial statements when assessing a company's performance or financial position.

For a listed entity, compliance with applicable accounting and disclosure requirements is particularly important because financial information is used by a large number of market participants. SEBI's disclosure framework requires listed entities to prepare and disclose information in accordance with applicable accounting and financial disclosure standards.

Accounting standards matter to investors because financial statements are an important source of information when analysing a company.

For example, accounting treatment can affect reported revenue, expenses, assets, liabilities, and profit. These figures may then influence financial ratios and comparisons across periods.

However, consistent accounting does not mean that two companies are automatically identical or equally attractive investments. Differences in business models, assumptions, estimates, financial performance, and risks still need to be considered.

When analysing an investment, measures such as standard deviation address a different question by helping assess the variability of investment returns. Accounting standards and investment-risk measures therefore provide different types of information.

Accounting standards determine how financial information is accounted for and presented. Tax rules determine how taxable income, deductions, liabilities, and other tax matters are treated under the applicable tax law.

The accounting profit reported in financial statements may therefore differ from taxable income.

This distinction matters when analysing a company's financial statements because an accounting treatment does not automatically determine the corresponding tax treatment.

Changes in tax legislation can also affect financial reporting. For example, businesses need to consider applicable tax requirements when recognising and disclosing tax-related amounts. The Direct Tax Code can be studied separately for the broader tax framework and proposed or applicable direct-tax provisions.

Yes, mutual fund schemes are subject to specific accounting requirements under the regulatory framework.

SEBI amended the Mutual Fund Regulations in 2022 to require AMCs to prepare mutual fund scheme financial statements and accounts in accordance with Ind AS from 1 April 2023. SEBI also issued guidelines covering the transition and related disclosures.

This is relevant to investors because the financial statements and disclosures of a mutual fund scheme provide information about its investments, income, expenses, assets, liabilities, and other financial matters.

The Total Expense Ratio is another important figure investors may encounter in mutual fund disclosures. It represents the expenses charged to a scheme and can therefore affect the amount of a fund's assets available to investors.

Accounting standards create a common framework for preparing and presenting financial information. In India, the applicable framework depends on the type of entity and relevant regulatory requirements, with Ind AS applying to specified companies and separate Accounting Standards applying to other companies and non-company entities. Understanding these differences can help you interpret financial statements more accurately and assess the information used in business and investment decisions.

Last reviewed: September 2026

Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.