Last editedNov 20202 min read
Accounting policies lay out the framework for companies that are preparing their financial statements. Each company’s policies will be selected by the management team, but the options are somewhat restricted by industry bodies and guidelines, such as the international financial reporting standards (IFRS). Managers must work within these guidelines but can opt for differing techniques depending on what works best for their business.
How are accounting policies used?
Accounting policies guide the company’s accounts department on how to prepare financial reports for both internal and external review. These policies help maintain consistency in reporting because they ensure the same techniques are used across different time periods, while also making sure that the company remains in-line with any statutory or legislative requirements.
Your company’s accounting policies should be clearly explained and available for employees who need to understand the company reports. In addition, accounting policies help auditors better understand a company’s financial position.
What are the differences between accounting policies and principles?
Accounting principles are the rules set out by financial authorities in relation to reporting and accounting. By contrast, accounting policies are the ways in which companies achieve these principles. Your organisation’s accounting policies can be specific to your business, provided that they comply with mandated regulations and provide your staff with a clear framework for preparing reports that meet the standards set out in the relevant accounting principles, i.e., GAAP, IFRS, etc.
What are the general accounting policies and procedures?
In Australia, the accounting principles are harmonised with the Government Finance Statistics by the Australian Accounting Standards Board (AASB). It’s imperative to check these standards and stay up to date with any changes as they occur. Otherwise, your business’s accounting policies could inadvertently be breaching the law. It’s also important to note that accounting principles set out items that don’t need to be disclosed, which can be beneficial to organisations.
What is the impact of accounting policies on financial statements?
As your accounting policies dictate how your company’s financial health is reported, they will clearly have a significant impact on your financial statements. The way you choose to report your figures can influence the way they’re recognised by internal and external stakeholders and can play a significant role in the decisions that investors make. Of course, it’s not just the figures themselves that your investors will base their decisions on. The way in which a company chooses to report its finances can provide insight into its strategies, progress, and potential.
Examples of accounting policies and estimates
Before we get started on examples of accounting policies and estimates, it’s essential to understand the differences between accounting policies and accounting estimates. Accounting estimates are assumptions that are made on your books where you do not have access to exact or precise numbers. These estimates can then be used to apply your accounting policies. Examples of items on your books that may require a certain level of guesswork include fair value, bad debts, and certain debt obligations. When it comes to accounting policies, elements that will need to be covered include depreciation, inventory, expenses, and so on.
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