What do you mean by Accounting policies? What are the basis of their selection? What are the different areas in which different accounting policies...

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What do you mean by Accounting policies? What are the basis of their selection? What are the different areas in which different accounting policies are possible? [June 2024, 1 Mark]

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Answer Solution: Meaning of Accounting Policy:  The accounting policies refers to — - the specific accounting principles; and - the methods of applying those principles  Adopted by the enterprise in the preparation and presentation of financial statements.  Management has to select, follow & disclose Accounting policies which it followed in preparation & presentation of financial statement, out of the different alternatives which may be permissible.  Ex.: Write off Depreciation by SLM or WDV, Value inventory cost by FIFO or Weighted Av.  Further Examples of Accounting Policies: (a) Recognition of contract revenue by % of completion method (b) Treatment of Goodwill (c) Val- uation of Investments (d) Provision for Retirement benefits etc.  Preparation of financial statements is the responsibility of the management of an enterprise. This includes selecting appropriate accounting policies and applying them consistently from one period to another. Requirements of AS-1 Disclosure of Accounting Policies: For proper understanding of financial statements, all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.  Disclose all significant policies adopted in the preparation & presentation of financial statements preferably at one place.  The primary consideration in the selection of accounting policies by an enterprise is that: the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the financial position & performance.  The major considerations governing the selection and application of accounting policies are: prudence, substance over form and materiality.  If any fundamental accounting assumption is not followed - Going concern, Consistency or Accrual Refer Chapter 2. Disclosure of the same in financial statements is required. Areas in which differing accounting policies are encountered: Areas Differing Accounting Policies possible Methods of depreciation, depletion and amortization. Straight line method, Written down value method. Treatment of expenditure during construction. Capitalize, expense, treat as deferred revenue expenditure. Valuation of inventories. Different cost formulas FIFO, Weighted average cost, etc. Treatment of goodwill. Amortize, do not amortize. Valuation of investments. Cost, lower of cost and fair value, fair value. Recognition of profit on long-term contracts. Percentage of completion method, completed contract method, different ways of measuring percentage of completion. Valuation of fixed assets. Costs less depreciation, costs, Costs less depreciation less impairment. Treatment of contingent liabilities. Make provision, disclosures only

What do you mean by Accounting policies? What are the basis of their selection? What are the different areas in which different accounting policies are possible? [June 2024, 1 Mark]

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