Accounting Policies: Definition, Example, and Explanation

Definition:

Accounting policies are the internal policies set by the entity to process, measure, recognize, record, as well as disclose the specific items or transactions in its financial statements.

Accounting policies might be different from one company to another; however, those policies are tailored to meet the specific International Accounting Standard or other standard bodies like local standards or regulations related to the purpose of financial reporting.

To ensure this, the companies set up their own procedures and manuals to ensure the consistency of practices and ensure that their accounting records are compliant with those accounting standards or local regulations.

To make sure the company’s financial statements are prepared in accordance with specific accounting standards or regulations, accounting policies have to tailor specifically to link with the company’s operation and accounting standards.

Types and example of accounting policies:

Policies are related to revenue recognition and measuring. This normally includes the criteria in which the company could recognize its revenue and amount to be recognized.

For example, the revenue is recognized only when the customer receives the goods. In this case, the evidence to support revenue recognition in the financial statements would be a delivery note signed and receipted by the customers.

Accounting policies related to expenses including the general expenses and specific expenses like depreciation. For general expenses, for example, training is recognized only when the training is incurred o not at the time cash advance for training.

The policies for expenses normally link to liabilities both recognition and measurement. Account policies for depreciation would be the nature of expenses that should or should not capitalize, the depreciation rate, and the process of disposal assets.

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Another simple example of accounting policy is inventories. Those policies will include what method the company uses to measure its inventories. It could be a weighted average or FIFO. The way how to entity control and manage its inventories.

For example, by using a perpetual inventories system or periodic inventories system. If the perpetual is used, inventories have to could continuously and randomly.

All of the policies in the company are very information therefore, management at all levels has to understand and need to train their staff to understand as well.

Or example, by using a perpetual inventories system or periodic inventories system. If the perpetual is used, inventories have to could continuously and randomly. All of the policies in the company are very information; therefore, management at all levels has to understand and need to train their staff to understand as well.

In most case, the company has an induction program at the first time a new employee come to work for the company, and such program helps the employee to be aware and understand about what are the important policies and Accounting Policies in the company, and what they need to do to avoid misconduct.

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