Accounting Policies and their Importance

There are many types of accounting policies being used by businesses. These policies help the business owners as well as the clients. Releasing financial statements in accordance with certain accounting policies is highly recommended, important, and very useful because these policies are the framework of accounting – they reflect the major accounting principles.

Here, we tell you about accounting policies and their importance.

But before we head over to that, let’s talk about what accounting policies actually are.

A brief description

Accounting policies are the principles used by a company to release its financial statements, especially the more detailed or complicated ones. Needless to say, different companies might have different accounting policies (but they all adhere to the Accounting Standards). According to the International Accounting Standards 8 (IAS 8), the accounting principles of a company are:

“The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.”

Without a reasonable excuse, a company cannot change its accounting policy for consecutive time periods. Accounting policies only apply to monetary statements, and there are policies for all stages and sizes of organizations and businesses.

Now then, off to their importance.

Consistency

Consistency in your financial reports is always preferred. In big companies, especially, where many accountants might have to go through the statements on many occasions – it really helps to have consistency in your reporting. Following certain accounting policies helps achieve exactly that.

Without accounting policies in financial reporting, you’d see different ways of tackling the same kind of transactions or sales figures, which might pose many problems and trust issues for your clients.

Increased usability and efficiency

Using solid accounting policies and principles helps improve financial reporting and accounting quality for long-term periods. For once, they help in better maintenance of ledgers and bookkeeping in general.

Following accounting policies also makes sure your transactions are recorded and processed in an organized way. This, while increasing efficiency, also increases the usability of the various financial statements a company might release. Needless to say, it also administers a better impression of trust.

Such principles help not only the accountants but also the business owners, stakeholders, managers, clients, etc. In practice, this proves the importance of following the different types of accounting policies.

Flexibility

Accounting policies are not laid down by organizations or aren’t fixated in a rigid manner. It has a certain scope for flexibility. Based on corporate needs and aims, a business owner can change accounting policies.

Changing these accounting principles doesn’t have any bad impact. Suiting their gains and avoiding their losses, companies can make changes to their accounting policies for subtle effects in their financial reporting.

Indirectly, this flexibility improves the performance of an organization, or at least its financial reporting wing.

Making complicated reporting easier

There are many statements that require a special kind of reporting. For example, revenue recognition, account consolidation, roadmaps of future investment or development, reporting of depreciation methods, etc.

Normal reporting, although abiding by the Accounting Standards, is not enough. In comparison, the streamlined and efficient construction of a company’s accounting policies proves really important to carry out and publicize these types of reporting. 

Contributed by Maria Nelson. Maria is a skilled maths-loving senior accountant? Her strongest point is perhaps his affinity for using cloud-based modern tools to deliver faster results. Her accounting methods are as swift as his fingers are on the keyboard. She is an explorer and always keeps finding something new to her accounting processes. To know more about her work, visit:

www.route29auto.com

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