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.