ACCOUNTING POLICIES

The Accounting Policies refer to those specific Accounting. Principles and Methods, which are adopted by the entity in the preparation of the financial Statements. For example, if an organization uses the FIFO method for Stock Valuation, then it would be an Accounting Policy of that organization.

It is to be noted that there can’t be a standard set of Accounting Policies, which are applicable to all organizations under all circumstances. What Accounting policy should be adopted by the organization? It is decided by the Management.

To ensure the better understanding of the Financial Statements, Accounting Policies have to be followed consistently.

If the accounting policies are not consistently followed, then the following useful comparisons cannot be made:

• Intra-Firm Comparison, i.e. the comparison of the figures of one accounting year with those of the other accounting year of the same firm.

• Inter-Firm Comparison, i.e. the comparison of the figures of one firm with those of another firm of the same industry, and

• Pattern Comparison, i.e. comparison of the figures of one firm with those of the industry to which the firm belongs.
  

However the changes in the accounting policies are recommended by AS-1 only in the following circumstances:

 (a)  If it is required by the law,

(b)  If it is required by the governing body of accounting, i.e. ICAI,

(c)  If the change is considered more appropriate for the true and fair presentation of the financial       statements.

Further, in case of any change in accounting policies, the following disclosure requirements are determined by Accounting Standard (AS)-1: 

(a) If the change has a material effect on the current period and the effect of change is        ascertainable, then such amount due to change should be disclosed.

(b)  If the change has a material effect on the current period, but the effect of change is not ascertainable, then the fact should be properly disclosed.

 (c) If the change has no material effect on the current period, but is expected to have a material effect in the later periods, then the fact should be properly disclosed.