Accounting policies are essentially general guidelines to be followed when recording and reporting accounting transactions. They give the accounting process some structure. Accounting methods are by no means detailed – instead, think of them as general guidelines similar to the Ten Commandments. Within the framework of these principles, only one thing (the principle of cost) is seriously questioned. All others have stood the test of time and will likely continue to be the guiding principles on which accounting activities will be based in the future. The most common principles are listed below. The accrual accounting concept required that income and expenses be recognized and recognized in the company`s financial statements when they occur, not when cash is paid or received. For example, depreciation rates and methods should be applied consistently to the same fixed assets from one accounting year to the next. If accounting policies change, the appropriate standard must be applied.

Because the U.S. does not fully comply with IFRS, global companies face challenges in preparing financial statements. Although the FASB and the IASB created the Norwalk Agreement in 2002, which promised to merge their unique accounting standards, they have made minimal progress. In an effort to unify, the FASB supports the development of IFRS. Principle of consistency. It is the concept that once you have adopted an accounting principle or accounting policy, you must apply it until a demonstrably better principle or method is put in place. Failure to comply with the principle of consistency means that a company can constantly switch between different accounting treatments of its transactions, making it extremely difficult to identify its long-term financial results. Principle of cost.

This is the concept that an entity should only recognise its assets, liabilities and equity investments at the initial acquisition cost. This principle becomes less and less valid as a variety of accounting standards move in the direction of adjusting assets and liabilities to their fair value. Principle of materiality. This is the concept that you should record a transaction in the accounting records if it could not have changed the decision-making process of someone reading the company`s financial statements. This is a rather vague concept and difficult to quantify, which has led some Picayune controllers to record even the smallest transactions. Comparability is the ability of users of financial statements to examine the financial data of several entities side by side, ensuring that accounting policies have been followed to the same standards. Accounting information is neither absolute nor concrete, and standards such as GAAP are developed to minimize the negative impact of inconsistent data. Without GAAP, it would be extremely difficult to compare companies` financial statements, even within the same industry, making it difficult to compare apples to apples. Inconsistencies and errors would also be more difficult to detect. Accounting policies vary from country to country. The International Accounting Standards Board (IASB) publishes International Financial Reporting Standards (IFRS). These standards are used in more than 120 countries, including the European Union (EU).

The Securities and Exchange Commission (SEC), the U.S. government agency tasked with protecting investors and maintaining order in securities markets, said the U.S. will not move to IFRS anytime soon. However, the FASB and the IASB continue to work together to enact similar rules on specific issues when accounting issues arise. In 2014, for example, the FASB and the IASB jointly announced new standards for revenue recognition. Critics of principled accounting systems say they can give companies far too much freedom and do not prescribe transparency. They believe that their reports may provide an inaccurate picture of their financial health because companies are not required to follow certain rules that have been established. With rules-based methods such as GAAP, complex rules can lead to unnecessary complications in the preparation of financial statements. These critics argue that strict rules mean that companies must spend an unfair amount of their resources to comply with industry standards.

Principle of accrual accounting. This is the concept that accounting transactions should be recognised in accounting years when they actually occur, and not in the periods in which cash flows are allocated to them. This is the basis of accrual accounting for accounting. It is important to prepare financial statements that show what actually happened during a billing period, rather than being artificially delayed or accelerated by the cash flows associated with it.