Why does your CA say this? Episode 3
What does the CA say?
Establishing Accounting Policies when your company grows in size of more than 10 employees.
Is Accounting Policies really important?
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. The view presented in the financial statements of an enterprise can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements.
The accounting policies followed vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. The disclosure of accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases.
How do Accounting Policies benefit the firm?
Accounting policies, as described already, brings in standards of accounting. These accounting policies answer some major questions like:
- How the business recognizes revenue
- How the business recognizes depreciation
- How research and developments costs are capitalized and which are expensed
- How the business would plan petty cash usage.
- How the business recognizes depletion and amortization
- How the business recognizes conversion or translation of foreign currency items
- How the business recognizes valuation of inventories
- How the business evaluates investments
- How the business treats retirement benefits
- How the business recognize profit on long-term contracts
- How the business valuation fixed assets
- How the business treats contingent liabilities.
How are Accounting Policies drafted?
Accounting Policies can be drafted by your CA or pretty much by the founders too. When drafting, one should consider necessary laws and policies for the business based on size, geography, and other relevant factors.
Factors to be taken into consideration while drafting:
- Accounting policies should represent a true and fair view of the state of affairs of the enterprise.
- Transactions and events should be governed by their substance and not merely by the legal form.
- Financial statements should disclose all “material” elements.
- Disclosure of accounting statements should form part of the financial statements
- Any change in an accounting policy which has a material effect should be disclosed.
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