Accounting Policies: What They Are And Why Every Business Needs One

For any business, the existence of a well-defined accounting policy is critical for reliable financial reporting. Unfortunately, many businesses do not understand their true value and therefore do not have Approved Accounting Policies in place. 

In this article, we will explain what an accounting policy is, why it is essential, and how it helps build credibility and confidence in an entity’s financial statements.

What is an Accounting Policy?

An accounting policy is a set of specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Some key questions it addresses include:

  • How should transactions be recognised and treated?

  • When should you record revenue or expenses?

  • How should unique transactions be treated when standards are silent on them?

Accounting policies are not generic. They are developed in line with the applicable accounting standards (such as IFRS for SMEs or full IFRS) and to suit an entity’s nature and its operations.

Who is responsible for preparing an accounting policy?
An entity’s management has the primary responsibility to develop and approve accounting policies. However, accountants and auditors play crucial roles in reviewing and ensuring they are in line with the relevant accounting standards.

Why is Having an Accounting Policy So Important?

An accounting policy is not just a procedure document. It forms the foundation for consistent, transparent, and credible financial statements. Here are three (3) reasons why it is critical to have one:

1. It Guides Every Step of the Accounting Process

An accounting policy provides a clear framework. It ensures that:

  • Transactions are recorded correctly right from the start of the transaction cycle.

  • Measurements of assets, liabilities, income, and expenses are based on clear, predefined principles.

  • Financial statements are prepared in a structured, reliable, consistent and comparable manner.
     

2. It Improves the Accounting Process

An accounting policy removes ambiguity when management and accountants face unusual transactions that require the use of judgment. This ensures consistency in the treatment of such transactions year on year. In situations where the accounting standards do not provide specific guidance, a well-prepared accounting policy can provide the guidance needed to address the specific issue.

3. It Builds Confidence Among Users of Financial Statements

A lack of clear accounting policies may raise doubts about the integrity of the information which has been presented in the financial statements. However, a well-documented accounting policy boosts the user’s confidence in its reliability and enhances the credibility of the information presented in the financial statements. 

Why It Is a Must for Your Business

If your entity prepares financial statements under IFRS for SMEs or full IFRS, having an accounting policy is not optional; it is critical.

Here’s what you stand to gain:

  • Consistency in treatment of transactions and in reporting

  • Reduced risk of non-compliance and audit issues

  • Clarity in decision-making for management and external users

 

BDO Ghana has the expertise to guide you in developing robust accounting policies tailored to your business needs. Contact us today and let us help you create an accounting policy that supports your business growth.