Accounting policies are the specific principles, bases, conventions, rules and practices applied by a business in preparing and presenting its financial statements.
What are Accounting Policies?
A business will have an accounting policy for all types of financial transactions. For example in relation to inventory the accounting policy might be stated as:
Inventory Accounting Policy
Inventories comprise goods and properties held for resale and properties held for, or in the course of, development with a view to sell. Inventories are valued at the lower of cost and fair value less costs to sell using the weighted average cost basis.
or for depreciation its accounting policy might be shown as:
Depreciation Accounting Policy
Property, plant and equipment is carried at cost less accumulated depreciation and any recognized impairment in value. Property, plant and equipment is depreciated on a straight-line basis to its residual value over its anticipated useful economic life. The following depreciation rates are applied for the business:
- Freehold and leasehold buildings with greater than 40 years unexpired – at 2.5% of cost;
- Leasehold properties with less than 40 years unexpired are depreciated by equal annual installments over the unexpired period of the lease; and
- Plant, equipment, fixtures and fittings and motor vehicles – at rates varying from 9%-50%.
Once a business has developed accounting policies, then they should be applied consistently for similar transactions, events and conditions. Accounting policies are normally only changed if it is required by an Accounting Standard issued by regulatory authorities within a particular country, or if it provides more reliable and relevant information about the effects of the transactions.
For further information on accounting polices see the Wikipedia definition.
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