What Are Accounting Policies? Definition, Example, and Explanation

Definition:

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

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 Examples of Accounting Policies:

Policies are related to revenue recognition and measuring. This normally includes the criteria by which the company could recognize its revenue and the 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 include general and specific expenses like depreciation. For general expenses, for example, training is recognized only when the training is incurred or 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 of 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 informative. Therefore, management at all levels has to understand and needs 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 informative; therefore, management at all levels has to understand and need to train their staff to understand as well.

In most cases, the company has an induction program for the first time a new employee comes to work for the company, and such a 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.

Why are Accounting Policies Important to the Company?

Management is responsible for preparing the company’s accounting policies to ensure that they are in line with the accounting standards, and local regulatory requirements. These policies will help to make sure that the company’s financial transactions are correct and timely prepared and available for management to review.

Accounting policies are also used as a tool to protect the company’s assets or interest from all kinds of errors or fraud that might be happened from all levels of internal or external stakeholders.

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To ensure the policies work as intended, assets or interests of the company are protected, new risks are addressed, the efficiency of the process involved in the accounting policies is improved, management should review its accounting policies at least annually and the submit the board of director for approval if there is any change.

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