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Introduction to Accoutnig Policies


The accounting policies refer to the specific principles and methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. There is not single list of accounting policies which are applicable to all enterprises in all circumstances. The management of each enterprise has to select appropriate accounting policies having regard to the nature and circumstances of the enterprise.

The overall objective in selection of these policies should be to prepare and present financial statements in way that they represent a true and fair view of the state of affairs of the enterprise.

Considerations of governing the selection and application 

The major Considerations governing the selection and application of accounting policies are as under:

Prudence : Uncertainties inevitably surround many transactions. This should be recognized by exercising prudence in preparing financial statement. Prudence does not, however, justify the creation of secret or hidden reserves.

Substance Over Form : Transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely with their form.


Materiality : Financial statements should disclose all items which are material enough to affect decisions. making an  ordinary Person.

Areas where different accounting policies may be adopted by different enterprises

Following are the examples of some of the areas in which different accounting policies may be adopted by different enterprises:

1. Methods of depreciation, depletion and amortisation.(STARAIGHT LINE , W.D.V., etc,.)

2. Treatment of expenditure during construction

3. Conversion or translation of foreign currency 

4. Valuation of inventories; (F.I.F.O, L.I.F.O., etc.)

5.  Treatment of goodwill

6.  Valuation of investments

7. Treatment of retirement benefits

8. Recognition of profit on long-term contracts

9. Valuation of fixed assets

10. Treatment of contingent liabilities

Recommendation of change in accounting policy 

The change in accounting policy is recommended only in the following circumstances:

(a) If it is required by statute.

(b) For compliance with an accounting standard.

(c) If it is considered that the change would result in a more appropriate presentation of the financial statements of an enterprise.

Disclosure In Case of Change In Accounting Policy

(1) If change has a material effect in current period and the effect of change is ascertainable the amount of change should be disclosed.

(2)  If change has a material effect in current period and the effect of change is not ascertainable wholly or in part the fact should be disclosed.

(3) If change has no material effect in current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed.

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