The Role of Accounting Policies in the Performance of Institutions

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Posted on Aug 19, 2021 at 05:08 PM

Definition of Accounting Policy:

Accounting policy means a system or set of financial and accounting rules; it is "a set of rules and steps by which it operates and is applied by the company or economic institution to prepare and regulate its financial statements."

It is important because it is the basic rule that represents the behaviour of the company to prepare reports daily or for final accounts and to extract the results of the business and then determine its financial position of it.

The application of accounting policy may vary from one company to another and from system to another. However, it must comply with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). This is indicated in our article.

In the following, we will talk about the importance of accounting policy and the application of its rules:

The importance of accounting policies

Set a framework and standards for practice at work is the best way to have your business correct and constant. The accounting policy is critical to represent the entire and accurate image of the company's accounting, financial and monetary practices.

The following reasons indicate the importance of accounting policies: 

1-The right framework:

The financial statements must be prepared according to a guiding framework because it helps to identify the consistency between financial statements. Financial affairs should clarify the company's policies because the accounting policy provides a solid framework to follow so that the company can properly prepare its financial statements.

2-An important advantage for investors:

 Following an accounting policy and preparing financial statements enables investors to examine data and compare the company with other companies in the same field or in other areas.

3-Facilitating government transactions:

Following the accounting policy and preparing financial statements in a framework, whatever the system is, it must comply with the Generally Accepted Accounting Principles; hence the government can directly follow data in the company to protect the interests of the investors and the company as well.

4-Disclosing and objectivity:

The accounting policies generally allow the company to declare objectively the comparisons with other companies and the efficiency of achieving planned goals. 

5-Identify and implement accounting policies in accordance with Generally Accepted Accounting Principles and associated matters: 

There are many international standards to identify and implement the accounting policy. "The International Standard number 8 Accounting Policies" is the most important one.

When any criteria or an international accounting rule are determined or applied to a particular company's status, the accounting policies should be applied to the item and the situation according to the standard used, and regularly follow instructions issued by International Accounting Standards Board. 

Consider several things before implementing the Accounting policy:

1-The maintenance of accounting policies:

The accounting policies must be implemented consistently and continuously by the economic institution or company to all financial transactions if no change is required according to other standards.

2-Accounting policy changes:

On terms if the change requires a more important standard or interpretation or if the new standard or change produces more accurate and relevant data for the current situation.

3-Economic factors and financing methods:

Because policies are influenced by the economic situation and financing methods from one State to another.

4-Social and cultural factors:

 We should take into consideration the culture and conditions of society when defining and implementing standards, because the accounting policies vary from culture to another.

We talked about many important points for accounting policies.

In order to acquire more knowledge about the subject we recommend you to enroll in one of our accounting training courses in Dubai.

Now, we should know how accounting policies can be applied in a suitable way in your company where they vary from one company to another and comply with accounting standards.