Accounting standards – Definition and overview

Accurate accounting requires that you register transactions in a manner that is clear for a third party to understand. Every transaction must be correctly booked from one account to another in the usual double accounting style. The generally accepted accounting principles espouses clarity and comprehension. Other parties (e.g. accountants or Her Majesty's Revenue and Customs (HMRC) investigators) must be able to clearly understand your records.

For this, a comprehensive breakdown of the accounts used is indispensable. Industry experts have developed accounting standard frameworks as a recommendation, so that not every company has to create their own, although it remains the prerogative of the company accounting department to decide whether to follow these frameworks or create their own. Depending on what industry you work in, you can choose a suitable system of order. This way, everyone can find their way around your accounts, and you always have the right accounts to use for your business transactions.

A set of accounts is the most complete, orderly list of accounts that are eligible for use in company accounting. Under the principles of UK GAAP, it is up to individual company accountants to create these accounting standard frameworks according to how they see fit. However, there are often certain patterns and templates that accountants follow for the sake of clarity and compatibility when comparing accounts between companies. Since different sectors of the economy also have different requirements and business transactions, it would not make sense for each company to use the same accounting standard. Therefore, following an account framework, can allow for comparisons with companies in the same sector.

While the accounting standards and their use are not regulated, there are certain rules that the accounting frameworks are based on, and they are partly based on balance sheet and profit and loss accounts for corporations. This gives a certain degree of solidity to the structure of the accounting standards. In the UK, industry associations and guilds often publish recommended charts of accounts for their industries to create a consistent standard to compare businesses.

On the one hand, a business will use accounting standards to create a chart of accounts that builds trust for third parties. On the other hand, this chart of accounts includes sub-accounts within an underlying accounting framework (for example, individual customer accounts in accounts receivable.)

Since there are no internationally binding rules for account standards, and different countries follow different accounting rules (GAAP variations, IFRS), accounting standards can often differ somewhat.

In a chart of accounts, the accounts are organised into a tiered structure, usually expressed in a four-digit number. There are two different basic principles of order for the most common account standards. The structure of this process is distinguished from financial statements (or balance sheet breakdown):

• Process outline: The accounts are sorted in order of operational processes. For example, the receipt of goods is preceded by the yield.
• Closing structure principle: These accounting frameworks are based on the necessary breakdown for balance sheets and profit and loss accounts. Therefore, the items, assets, and liabilities in the annual financial statement followed by income and expenses are discerned from the profit and loss account.

In order to set up a chart of accounts using an accounting standard, a company accountant must first define the various business accounts and assign a different number to each account. Depending on the size of your company, three or four numbers may be sufficient, but it is worth remembering that if you anticipate new accounts, and further sub-accounts being created in the future, starting with a three or four-digit number will give you more room to expand and add extra accounts later on. Adding more detail to your account labelling at the start requires more effort but is sure to save time and work down the line. Be sure to number your accounts in a logical way – accounting firms document practical frameworks for this.

Company accountants must remember that there are certain legal requirements concerning accounts and tax reporting. It is worth consulting with a tax professional to ensure that your company adheres to government accounting regulations.

Here is a sample chart of accounts for a British company:

Current Assets

Current liabilities

Please note the legal disclaimer relating to this article.