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Accounting Policies

Candlefocus Editor
Accounting policies are the guidelines and procedures used by a company to prepare its financial statements. They are designed to ensure that financial information provided is accurate and consistent from one reporting period to the next. The policies are also created to stay within the regulations and standards set by governing accounting bodies as well as laws. Accounting policies can include, but are not limited to, recording and reporting transactions and depreciation, inventory, revenue recognition and valuation methods. Properly applied, accounting policies ensure all transactions are accurately recorded, classified and reported.

While all companies must adhere to the Generally Accepted Accounting Principles, the choice of accounting policies is left to the company and indicates how aggressive or conservative they are in reporting their earnings. For example, the choice between reported gross profits or net profits (+ tax). This choice depends on a company's ability to cover their tax liabilities. Another example is determining how to value their goods and services offered. Companies may choose to employ a policy that is more advantageous to their financial position.

Accounting policies should be documented and presented in the financial statements accompanying each annual report. This allows users of financial statements to understand the accounting policies used in compiling the financial statements. These policies should also be revisited each year, as accounting standards and laws may change over time.

Overall, accounting policies are essential in ensuring accurate and consistent financial reporting, while adhering to the regulations and standards set. Companies must select their accounting policies carefully, as it will indicate the level of aggressiveness or conservativeness in the company’s reported financial results. Detailed documentation must accompany each financial statement to ensure users of the financial statements understand the accounting methods surrounding each report.

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