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Accounting Policies

Praveen Kumar Urimi
30/03/2021 0 0

Definition: Accounting Policies refer to specific accounting principles and applying those principles adopted by the enterprise in the preparation and presentation of Financial Statements.

 

Need for Accounting Policies: They provide uniformity and enable comparison of financial performance between two entities. In the absence of these policies, each entity will apply its policies, which will alter the entity's financial position and results.

E.g., If Entity-A and B purchased Raw material at Rs. 1Crore on 1st Jan 2021, If Entity-A's policy is to value Raw material stock at Cost and Entity-B, it is to value at Cost or Net RealisableRealizable Value whichever is less. At the Balance Sheet date (Say at 31st Mar 2021), if the Net Realisable value falling to Rs. 80Lakhs, Entity-A profit will be more by Rs.20Lakhs than in Comparision to Entity-B, even though both the entities have purchased at the same value. A prospective Investor Comparing the entities' financial performances will be under the impression that Entity-B is not performing well, and he will go ahead and invest in Entity-A. So, to bring Uniformity accounting policies are to be disclosed.

 

Selection of Accounting Policies: As seen earlier, we can understand how a single policy alters the entity's performance. Hence they are to be selected with due care. Significant characteristics that should be considered while selecting Accounting policies are Prudence, Substance over form, and Materiality.

 

Change in Accounting Policies: A shift in Accounting policies should be made in the following situations:

A. If it is required as per some statute or in compliance with an accounting standard.

B. Change would provide a more appropriate presentation of financial statements.

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