What is the Meaning and Selection of Accounting Policies?
The accounting policies can be defined as the specific principles, rules, conventions, as well as practices that any entity will apply during the preparation of the accounting statements. The meaning and selection of accounting policies assist in the creation of these statements. These policies are used for different purposes such as sales management, transactions, and so much more.
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Accounting Policies
The selection of different accounting policies is essential for any company because it will help in establishing a proper accounting statement. Accounting policies are created as specific policies that might alter from time to time in order to assist with the maintenance of the profit rate for any company. Hence, the selection for accounting policies might end up changing in order to adjust to the needs and requirements that a company has.
An Overview Of Accounting Policies
The overview of accounting policies is meant to provide a detailed explanation of the different sections that are mentioned in these policies. The company has to follow a set of specific regulations and rules when it comes to proper decision-making. The different accounting policies are the ones that tend to form the perfect base for these decisions that are to be made by the company. It is important for the company to have specific policies as it helps in deciding the accounting management of the company. The accounting policies for the company will help in the displaying of the different management records and suggest whether these are aggressive or progressive in nature.
Any company develops a particular pattern when it comes to feeding the basic fundamentals of marketing. This is known as earning profits. Accounting helps in keeping track of the progress made by the company and this is where the accounting policies come forth to help.
Meaning and Selection of Accounting Policies
The meaning and selection of accounting policies are other important things that people need to know about. It can be said without a single speck of doubt that the accounting policies tend to consist of different procedures, methods, as well as measuring systems that assist in the presentation of information in various financial statements of the company. Any company will prepare a particular report for the quarterly earnings that they have in order to provide a report for their performance. This report will include details such as the earning of profits from daily sales, earnings per share, net income, and net sales.
The demonstration made by the company in this particular report will be provided to the investors. On the basis of the report of quarterly earnings, the investors will make use of the information and then decide whether investing in the company is a good idea or not.
The selection of accounting policies happens in order to make sure that the reports are created in the best way possible for sure. In the next section, students will learn about the selection of policies of accounting.
How does the Selection of Accounting Policies happen?
Different companies work in different ways and key points in order to select the different accounting policies. There are considerations made for the selection of accounting policies. Here are some of them mentioned below.
Accurate and Precise Presentation: The different accounting policies should properly convey the information about the account. These policies shouldn’t have unnecessary adjustments but must work to present the information in a simple and genuine format. With more accuracy, the company should be creating the list for inventory as well. This will have a list of the assets and the expenses made by the company.
Conservatism: Another one of the main factors responsible for the selection of accounting policies is conservatives. When it comes to choosing something from the principles that are always accepted, the priority of the firm often moves to the policies which have a pretty conservative nature with regards to the net income. A company might have different uncertainties. Hence, having a proper and conservative approach can actually help a lot.
Profit Maximization: Here is another main factor considered for selecting the list of accounting policies and it is the maximization of profits. It actually works in a direction that is opposite to conservatism. The main belief here is to maximize the cumulative earnings that are reported. Hence, the company has to recognize the important revenues pretty quickly.
Restrictions on Selecting Accounting Principles
Following are the restrictions on selecting accounting principles.
While there are different policies for businesses to adapt, it doesn’t mean that they can go ahead and choose a policy that they want. Also, a policy cannot be discarded when the parameters don’t suit the company.
There are certain rules that should always be obeyed in accounting policies. A company complies with a permanent set of policies and a secondary set for covering the different requirements.
In case the company has separate financial reports as well as income tax reports, the practices will be considered legal. The organizations are just looking for understandable and clear reports for a company.
These reports should always be open for examination. The statements should display the assets and liabilities owned by the firm.
The different significant accounting policies are the rules that must be followed by any company. These policies help in making the firm a better one as it helps the investors in making better decisions for the company. There are some accounting policies FAQs mentioned below.
FAQs on Understanding The Meaning And Selection Of Accounting Policies
1. What are accounting policies?
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an enterprise in the preparation and presentation of its financial statements. As per Accounting Standard (AS) 1, these policies are chosen to ensure the financial statements provide a true and fair view of the company's financial position and performance.
2. Why is the selection of appropriate accounting policies important for a business?
The selection of appropriate accounting policies is crucial because it directly impacts the reliability and comparability of financial statements. Proper selection ensures that financial reports are consistent over time, comparable with other companies in the same industry, and accurately reflect the company's financial health. This builds trust among investors, creditors, and other stakeholders.
3. What are the three major factors to consider when selecting an accounting policy?
When selecting an accounting policy, management must primarily consider three major factors to ensure the information is useful:
Prudence: Policies should be selected to anticipate no profits but provide for all possible losses. This means being cautious and not overstating assets or income.
Substance Over Form: The accounting should reflect the economic reality of a transaction, not just its legal form. This ensures the financial statements are not misleading.
Materiality: The policy should focus on items that are significant enough to influence the decisions of users of the financial statements. Insignificant items can be treated with more convenience.
4. Can you provide some examples of areas where different accounting policies are applied?
Certainly. Different accounting policies can be selected for various areas, including:
Methods of depreciation: A company can choose between the Straight-Line Method (SLM) or the Written Down Value (WDV) method.
Inventory valuation: Policies like First-In, First-Out (FIFO) or Weighted Average Cost method can be used.
Treatment of research and development costs: A company must decide whether to expense these costs immediately or capitalise them.
Valuation of investments: Investments can be valued at cost or at market value, depending on their nature (e.g., short-term vs. long-term).
5. How do the fundamental accounting assumptions influence the selection of accounting policies?
Fundamental accounting assumptions form the foundation upon which policies are selected. They are presumed to be followed in preparing financial statements. For example:
The Going Concern assumption allows for policies like depreciating assets over their useful life.
The Accrual assumption requires policies that recognise revenue when earned and expenses when incurred, not when cash is exchanged.
The Consistency assumption dictates that once a policy is selected (e.g., WDV for depreciation), it should be followed year after year to allow for meaningful comparison.
6. What is the difference between an accounting policy and an accounting procedure?
An accounting policy is the high-level rule or principle a company decides to adopt (the 'what'). For instance, deciding to value inventory using the FIFO method is a policy. An accounting procedure, on the other hand, is the detailed, step-by-step process used to implement that policy (the 'how'). This would include the specific steps for recording inventory purchases and issues to calculate the closing stock value based on FIFO.
7. Under what circumstances can a company change its accounting policies as per the CBSE curriculum for the 2025-26 session?
A company cannot change its accounting policies arbitrarily, as this would violate the principle of consistency. According to Accounting Standard (AS) 1, a change is permissible only in three specific situations:
If the change is required by a statute or law.
If the change is required to comply with an Accounting Standard.
If the change will result in a more appropriate presentation of the financial statements, providing more reliable and relevant information.
