Accounting and Financial Policies: A Brief Introduction

Accounting and Financial Policies: A Brief Introduction

Successful financial & accounting policies and procedures can help with effective financial management, risk reduction, and financial operations linked with the firm's overall goal. 

Before you start building or changing financial policies and procedures for your company, you must first understand what they are, their intended purpose and benefits, how to implement them, and when they should be reviewed.

What are Financial Policies and Procedures?

Financial policies are the standards that govern an organisation's financial transactions. 

Well-designed financial policies should be consistent with the overall goals of the business. 

And they should be constructed in such a manner that everyone in the organisation knows them whilst still allowing for flexibility in implementing such policies. 

Financial processes define how specific tasks are completed, and policies are followed. They could be flowcharts, checklists, or textual narratives. 

Whatever form they take, they should offer the required "how to" information to the individual(s) responsible for carrying out those operations concisely. 

For example, a financial reporting and closing policy procedure might declare, "By the 15th day of the next month, the accounting manager evaluates the bank reconciliation and signs off and dates the reconciliation."

The Goals and Advantages of Financial Policies and Procedures

Responsibilities are assigned, and expectations are established.

Efficient rules and processes will establish duties and obligations within the firm's financial sector. 

All parties involved will have a piece of better knowledge of accounting policies and safeguards in place if these roles, authority, and tasks are fully defined. 

Correct execution leads to less confusion and greater accountability. It also results in more clearly defined objectives for how professionals will carry out their job responsibilities.

1. Asset protection

Policies and procedures define and codify the system of internal controls in place to protect the firm's assets. 

This includes ensuring proper role separation, creating permission criteria and limits, and restricting access to the organisation's assets.

2. Keeping Consistent Records

Well-written procedures establish the framework for uniform transaction processing across the organisation and over time. 

Furthermore, establishing standards and procedures decreases the chance of systems relying on "institutional knowledge," which can be lost due to human turnover.

3. Financial Reporting that is Accurate, Reliable, and Relevant

Adherence to financial policies and procedures aids in correctly recording transactions following applicable accounting standards and the company's financial reporting structure. 

Maintaining the financial reporting system ensures that decision-makers in the company have timely access to the financial information they need to make choices.

4. Comply with all regulatory requirements.

Many non-profit organisations receive government grants that require them to follow the rules of the Uniform Guidance (2 CFR 200). 

In many cases, the Uniform Guideline expressly states that the organisation must have documented policies and/or processes in place to guarantee that certain aspects of the guidance are implemented into the organisation's fiscal operations. 

Entities must, for example, have clear procurement policies and procedures in place for establishing the allowability of a cost to a federal award. 

As a result, the policies and procedures manual become an important document for ensuring compliance.

5. Implementation

Individuals must have access to regular training on the organisation's financial policies and procedures to reap the benefits of the structure created by the document. 

Furthermore, policies should be enforced regularly and consistently at all levels of the business. Otherwise, the firm risks losing compliance with its policies and the strategic value that they were put in place to achieve.

Finally, the board owes the organisation a fiduciary duty to guarantee that its resources are spent wisely. 

This includes ensuring that solid, documented policies and processes are in place to preserve such resources. Management ensures that these are communicated, followed, monitored, and corrected as necessary.

6. Updates and regular reviews

The financial rules and procedures are a document that should be reviewed and updated regularly. As firms grow in size and complexity, deploy new systems, or face changes in rules or accounting standards, existing processes and policies will likely need to be adjusted. Furthermore, any best practices or "lessons learned" must be periodically implemented into financial rules and procedures to ensure continuous process improvements.

What Are Accounting Policies?

Accounting policies are the specific accounting principles and methods of applying those principles that the firm uses in preparing and presenting financial statements.

There is no single set of accounting policies that applies to all situations. 

Because of the diverse and complicated economic activity in which firms operate, alternative accounting concepts and techniques for applying those principles are appropriate.

The selection of acceptable of what are the accounting principles and procedures for applying those principles in each organisation's unique circumstances necessitates considerable judgment on the part of the enterprise's management.

In recent years, the Institute of Chartered Accountants of India's various Standards, in collaboration with the efforts of government and other regulatory agencies, as well as progressive management, have reduced the number of acceptable alternatives, particularly in the case of corporate enterprises.

While future efforts in this area are anticipated to reduce the number even more, the availability of alternative accounting principles and methods of applying those principles is unlikely to be eliminated due to the various situations faced by the firms.

The following are examples of different businesses using distinct accounting policies.

(a) Depreciation, depletion, and amortisation methods

 (b) Construction expenditure treatment

 (c) Foreign monetary conversion 

(d) Inventory valuation

 (e) Goodwill valuation

 (f) Investment valuation 

(g) Retirement benefits valuation 

(h) Profit recognition on long-term contracts

(i) Fixed asset valuation

 (j) Treatment of liabilities

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What are the Accounting Policies?

A few of the accounting policies are mentioned below:

1. Accounting Basis

The Company's financial statements are prepared in conformity with India's Generally Accepted Accounting Principles. The Company compiles these financial statements following the Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 (as amended) and the relevant provisions of the Companies Act, 1956, in all essential aspects.

  • Except in the case of severe uncertainties, the Company adopts the mercantile system of accounting and recognises income and expenditure on an accrual basis.
  • Except for certain fixed assets, which are stated at fair value, financial statements are based on historical cost.

2. Using Estimates

Preparing financial statements following Generally Accepted Accounting Principles (GAAP) necessitates management's application of the accounting policies, reported amounts of assets, liabilities, income, and expenses, and disclosure of contingent liabilities on the date of the financial statements. 

Actual results may differ from those projections. Estimates and underlying assumptions are constantly evaluated. Any changes to accounting estimates are reflected in current and future periods.

3. Classification (current and non-current)

All assets and liabilities are divided into two categories: current and non-current.

When an asset meets any of the following requirements, it is classified as current:

a) It is expected to be realised or sold, or used throughout the Company's normal operating cycle;

b) It is principally held for trading;

c) It should be realised within 12 months of the reporting date; or

d) It is cash or cash equivalent unless it cannot be exchanged or utilised to settle a liability for at least 12 months following the reporting date.

The current share of non-current financial assets is included in current assets. Non-current assets are all other assets.

4. Business Cycle

All assets and liabilities have been categorised as current or non-current based on the Company's typical operating cycle and other criteria outlined above under the Act's new Schedule VI. 

For current and non-current asset and liability categorisation, the Company has determined its operating cycle to be 12 months based on the nature of services and the time between the acquisition of assets for providing services and their realisation in cash and cash equivalents.

FAQs

  • What is the difference between a Change in Accounting Policy and Change in Accounting Estimate?

The distinction between accounting policy and accounting estimate is significant because changes in accounting policies are typically implemented retrospectively, whilst changes in accounting estimates are typically applied prospectively. As a result, it demonstrates its impact on both period trends and reported results.

  • What are the distinctions between accounting policies and accounting principles?

Accounting principles are the norms established by financial authorities for reporting and accounting. On the other hand, accounting policies are the means through which businesses implement these principles. Accounting policies at your organisation can be tailored to your individual needs as long as they comply with mandated regulations and give your staff a clear framework for preparing reports that fulfil the standards set out in the relevant accounting principles, such as GAAP, IFRS, and so on.

  • What effect do accounting policies have on financial statements?

Accounting policies greatly impact your financial accounts because they define how your company's financial health is portrayed. How you disclose your data can influence how internal and external stakeholders perceive them, and it can substantially impact investors' decisions. Of course, your investors will make their selections on more than simply the numbers. How a firm reports, its finances might provide information about its strategies, progress, and possibilities.

  • How are accounting policies implemented?

Accounting policies direct the accounts department of a corporation in how to compile financial reports for both internal and external examination. These rules aid in reporting consistency by ensuring that the same methodologies are used throughout different periods while also ensuring that the organisation complies with any statutory or legislative requirements.

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