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Accounting policies are the general financial principles an organization uses to report its earnings and losses. Policies differ from industry to industry, but they generally deal with expenses, inventory pricing, investments, payroll and other essential business categories. This flexibility brings up many questions and issues for those reporting the numbers and requires accountants to closely monitor results.
Accounting policies are designed by accountants but carried out through management. One example is a company where policies are in place that require inventory pricing to be meticulously documented to account for each department's budget. Another example is a company that requires a more specific distillation of expenses, such as an itemized showcase of research and development costs. Projections also are key for some industry policies, such as in the banking industry, where many accounting policies require an estimation of how many loans are predicted to fail and their financial ramifications.
Accounting policies are most used when reports are written. Whether monthly, quarterly or annual, a successful set of policies will result in a clear picture of a company's financial standing. An unsuccessful set of accounting policies will result in a skewed view of a company's performance and financial standing in a report.
Most reports will contain a summary of significant accounting policies. This is a complement to the actual numbers, because this statement outlines policies and tells how each was enacted. Generally, this will include all traditional practices and any ones particular to a specific company and a definition about why this was necessary.
There is often a concern about fraud, because the parties responsible for writing the policies are not the people responsible for using them. Accounting policies promote honesty through good will and trust, but these bonds sometimes are broken. Whether it is a major transgression, such as a department hiding a large profit in order to absorb it into a future loss, or something small, such as failing to report the potential loss of returned merchandise, they are constant concerns to accountants. As a result, many accountants keep a vigilant watch over an organization's numbers and perform internal audits to make sure reports are accurate.
Accounting policies are in place to assure that a company's financial status is properly reflected in its reports. By establishing and promoting these principles, accountants attempt to mold a company's financial transparency. There is a risk of fraud, so accountants maintain a watchful eye on the entire process to keep the books clean.
@browncoat - It's good advice to follow. I know for many people who are starting out, particularly creative people who just want to sell a few paintings, or whatever, the accounting side of things seems quite overwhelming.
But it's really not that complicated. And, if you are worried about it, there is plenty of information to be found in the library or online. I think good examples of accounting policies can be found all over the place, actually, so you have no excuse for not sorting this out.
Even if you have already started, it's never too late to change your accounting method.
Even if you only have a small business, making clear accounting policies is really important. My parents ran a small business selling products out of our spare room when I was a kid and I remember they ran into all kinds of trouble before they sat down and really worked out their accounting policies.
Without a clear way of showing what is coming in and what is going out, and what needs to be kept aside for expenses and so forth, it's almost impossible to keep yourself afloat and the stress can be incredible.
So, if you are planning to go into a small business, even if it is just you as an individual, make sure you know exactly what your accounting procedures are before you start.
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