Considerations in the Selection of Accounting PoliciesThe primary consideration in selecting accounting policy is to prepare and present financial statement in such a way that it gives a true and fair view of an enterprise. The main considerations in selecting accounting policies are:
- Prudence: Many transactions in business take place under some uncertainty. These uncertainties should be recognised by following the prudence principle. Prudence means conservatism, which states, provide for all expected losses but never for anticipated profits. As per this assets and income should not be overstated and liabilities and expenses should not be understated. All the uncertainties and their nature should be disclosed so that it helps in proper decision making.
- Substance over form: According to this concept, only the economic substance of transactions and events must be recorded in the financial statements rather than just their legal form in order to present a true and fair view of the affairs of the entity. Substance over form is critical for reliable financial reporting. It is particularly relevant in case of revenue recognition, sale and purchase agreements, etc.
Example: If the enterprise purchases a land for business purpose and makes the payment on 25th March but the registration of the same takes place on 10th April, in such case the purchase of land should be recorded even though the ownership on papers is with the original owner of the land as on year ended 31st March.
- Materiality: Financial statements should disclose all the material items, which influence the decision of the users of the financial statements.