Accounting policies govern how a company tracks and reports its financial information. It establishes the fundamental principles and practices that the company will follow in the preparation of its financial statements. Assets are the economic resources that a company has at a given point in time that are expected to benefit from future operations. Assets include land, buildings, work-in-process, inventory, and receivables. The following are examples of the most common types of assets.
Financial statements are the foundation of a company’s financial reporting, so it is imperative to follow accounting policies as closely as possible. They should reflect a company’s overall financial picture and be based on a standardized format for reporting. Ultimately, this will help investors gain more confidence in the numbers that the company produces. Additionally, accounting policies define the information that a company must disclose to investors. If the company fails to follow the guidelines it outlines in its policies, it will be difficult for investors to trust the financial statements it produces.
The principles of FRS 18 are applicable to any business, no matter its size or industry. FRS 18 sets forth principles for the selection of accounting policies, disclosures needed to inform users of the policies, and principles for measuring financial results. The principal principles of FRS 18 state that relevant financial information must be complete and timely. It must also be prudent under uncertainty, and it must reflect the substance of the entity. Further, it must be timely and reflect the accumulated depreciation of its fixed assets.
As a business grows, it must determine which accounting policies are most beneficial for it. Companies may use a first-in-first-out method or the average cost method to value their inventory. In the former case, the cost of the inventory is weighted averaged across all inventories. The last-in-first-out method, meanwhile, uses the ‘weighted average cost’ method to value inventories. A company’s costs of goods sold will rise or fall, whereas its cost of the inventory will remain constant.
Some companies also make changes to their accounting policies when the circumstances warrant such a change. This is particularly important if the new accounting policy has an impact on the company’s financial statements, including the ability to meet its objectives. If a change in accounting policies is not a result of a change in internal controls, the company should adjust its financial statements accordingly. It is important to note that changes to the policies are not retroactive. The accounting policy should reflect changes in circumstances and experience.
The adoption of accounting policies requires the creation of sound written policies. The process should be governed by a framework that assigns responsibility to senior management at the corporate level. Business units should develop policies based on the 80/20 rule. Lastly, policies should be updated regularly to reflect changes in accounting. These changes are necessary to protect the interests of investors and ensure consistency in the financial statements. So, how do you create the most appropriate accounting policies? The key is consistency.