A set of methods, rules, principles, bases, conventions, and practices that is used and applied by an entity in the accounting process (measurement, recognition, presentation, and disclosure) including the preparation of its financial statements. Accounting policies determine how the effects of events and transactions are incorporated in the financial statements for a specific period.
For a particular transaction, the accounting policy usually involves determination of the following key aspects:
- Recognition criteria: recognition/ derecognition/ non-recognition of elements (assets, liabilities, gains or losses) as a result of an event/ transaction.
- Measurement bases: the proper way to attribute a monetary amount to the elements being recognized.
- Presentation rules: the way of presenting the elements, and their respective places, in the financial statements.
Examples of accounting policies include those relating to the selection of proper methods for valuation of inventory (using FIFO, average cost or any other basis), basis of measurement of non-current assets (e.g., historical cost), basis of preparation of financial statements (accrual basis, cash basis).
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