What should be included in an accounting policy?

What are Accounting Policies?

Accounting policies are the rules used by an entity to ensure that transactions are recorded properly and financial statements produced correctly. These policies ensure that accounting activities are handled consistently over time. They are also needed to ensure that an organization follows the applicable accounting framework, such as GAAP or IFRS.

The aggressiveness or conservativeness of a firm's accounting policies provides an indicator of how the management team uses accounting to pursue higher "book" profits. Thus, investors should peruse all published policies of an entity to see if the financial statements it produces have the potential to reflect an aggressive view of its results and financial condition.

Examples of Accounting Policies

Accounting policies are included in the notes that accompany the financial statements of a business. Examples of these policies are how a business recognizes revenue, how it recognizes depreciation, which cost flow method is used to recognize inventory, and which research and developments costs are capitalized and which are expensed.

What are Financial & Accounting Policies?

Financial and accounting policies are the procedures and guidelines followed by your company to prepare and report financial statements.

Financial and accounting policies are a set of standards, methods and measurement systems that govern the preparation and reporting of your company’s financial information. These policies area approved by your management team and developed for a long term, reflecting your company’s values and ethics. These are usually included in the notes that accompany your financial statements.

They cover:

• Revenue Recognition: Process of recognizing your company’s revenue, including advance payments or receipts for products or services that have not been delivered (deferred revenue)
• Doubtful Debts Allowances: Policies used to determine the value of your company’s revenue or loans provided to third parties that are unlikely to be collected
• Fixed Asset Depreciation: Process of calculating the annual depreciation of your company’s fixed assets, including rate of depreciation and expected lifetime of fixed assets
• Employees’ Benefits: Procedure of creating and maintaining a reserve to distribute your employees’ benefits and incentive plans such as leave encashment
• Budgeting: Processes related to finalizing the budget required to meet your company’s monthly, quarterly and annual growth plans
• Investment and Hedging Policies: Process of reviewing and approving investments in or by your company and protecting your interests against market risks such as currency fluctuations

Why are Financial & Accounting Policies important for business today?

Financial and accounting policies enable your company to:

• Maintain consistency in accounting the financial transactions across your company and jurisdictions
• Streamline decision-making processes to make book-keeping or accounting processes more efficient
• Ensure that your employees are following correct accounting and reporting practices for all transactions
• Communicate the process of calculating employee benefits and incentive plans to your employees
• Ensure financial and regulatory compliance with respect to disclosure

Why is it important for an event tomorrow?

Financial and accounting policies are important for an event tomorrow, as they help:

• Assess the financial and accounting policies used by your company to create your financial statements
• Measure consistency in reporting across group companies and evaluate internal processes
• Evaluate the process of reviewing, authorizing and approving investments in your company

Pros of addressing Financial & Accounting Policies

• Help reduce management and accounting issues such as overstatement or understatement of your company’s financial performance
• Serves as a training manual for new and existing employees to ensure accurate reporting and disclosure
• Resolve any potential disputes related to your company’s doubtful debts due to defined policies
• Avoid any discrepancy in employee benefits and incentives by specifying a standardized procedure
• Ensure accuracy related to your company’s financial information and avoid any discrepancy in reported numbers
• Assist your company in complying with various regulatory requirements across jurisdictions

Cons of not addressing this topic

• Increase in time required to file financial statements with regulators across jurisdictions
• Overstatement or understatement of financial performance of your company
• Increase in regulatory and litigation risks due to non-compliance with accounting standards
• Decreased credibility and reliability in company financial reporting.

What are the 5 accounting policies?

What do you mean by accounting policy?

What is considered in selection of accounting policies?