Updated September 26, 2017
IvelinRadkov/iStock/Getty Images
Updated September 26, 2017
General Accounting Policy and Procedures Manual and QuickBooks Information December 2013. Accounting records. For a business, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include three basic. Benefits of Policies and Procedures. Now that we have a better understanding of policies and procedures, let’s take a look at the major benefits they provide. Employees understand the constraints of their job without using a ‘trial and error’ approach, as key points are visible in well-written policies and procedures. General Accounting Policy and Procedures Manual and QuickBooks Information. Accounting records. For a business, all the relevant financial information, presented. A) The key purpose of designing this accounting policies and procedures manual is to provide guidelines to all staff at INDEPTH Network, particularly the Finance and Accounting staff for the orderly execution of their respective responsibilities for the purpose of preparing the Secretariat’s financial statements.
Accounting Policies And Procedures For Construction Company Pdf
Accounting policies and procedures are not one and the same thing, though workers in an office often confuse the two. Accounting policies represent the guidelines or rules that define what the accounting department expects in a given situation. By creating policies, the accounting department ensures that company rules and standards are maintained and adhered to in a consistent manner by all those affected. The procedure represents the how-side of the equation by defining the individual steps that ensure the company's accounting policies are maintained and internal controls are in place.
Define the Policy
When coming up with the accounting policy and procedure handbook used by accountants and others in the company, you must first define each rule or guideline as an individual policy that you want people to follow. Do not mix policies together, because it is too confusing. Accounting departments create cash-flow policies, travel reimbursement policies, petty cash policies, account payable policies or billing policies, just to name a few. The policy should define the rule -- known as the what -- and include who must adhere to it and why it must be adhered to. Policies and procedures are maintained as separate documents.
Write the Overview
Each policy must include an overview or summary of the guideline or rule. The overview comes first, with detailed information that includes the specifics. For instance, an accounting department might have a petty cash fund policy that details how much money will be made available for petty cash, the type of purchases it covers and the title of the person who is responsible for ensuring it is maintained properly. The policy doesn't list people's names, but rather the title or position in the company responsible for it.
Outline the Procedures
Procedures are the step-by-step process by which individuals adhere to the company policy. For instance, an accounting department may set a cash-flow policy that specifies how much operating cash should be available at all times and what must occur if it is not available. But to ensure the policy is maintained, someone in the accounting department must complete bank account reconciliations. The bank reconciliation process has detailed steps on how to do the bank reconciliation to ensure the cash-flow policy is adhered to. To write the procedure, outline each step that must take place, including the titles of people who complete each step and what happens in the subsequent steps.
Number the Steps
Write procedures in the order that the steps must occur. For example, using the bank reconciliation process, start with the first thing that needs to occur, such as: bank statements are to be given unopened to the accounting manager. Include the steps the accounting manager must perform before passing the actual reconciliation work to someone else in accounting. This could include such things as a quick review for check inconsistencies, payee names and more.
Policy and Procedure Manual
Include a list of the titles in the accounting department with brief descriptions of the duties performed by each position in the company at the front of the policy and procedure manual. This helps create internal controls while ensuring separation of duties. Write policies on individual pages, creating a new page or set of pages for each policy. Each policy receives its own heading and title in the table of contents to make it easy for people to look them up. After the policy, include all the procedures on their own pages as backup. The table of contents may include the 'Cash Flow Policy,' as a main title with subheadings and their own pages that include 'Bank Reconciliations,' 'General Ledger Bank Account Reconciliations,' or any other procedures that apply to that specific policy.
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Accounting Policies – From the name itself, it is clear that these policies are set of rules that dictate a company’s financial accounting.In this article, we will go at length about what accounting policies are and the usefulness of these policies.
Without much ado, let’s get started with the meaning of policies.
What are Accounting Policies?
Accounting policies are a set of rules or procedures by following which a company prepares its financial statements.
But you may ask why should a company need accounting policy?
When a company prepares a complex statement or calculate an advanced method of accounting, it needs guidelines to adhere to. For examples of accounting policies, to choose depreciation method, a company needs to follow specific accounting policy.
Accounting policy may vary company to company; but whatever a company does in regards to accounting policy, it should be in accordance with the generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
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These policies are structures or frameworks for companies to follow. As the top management sets the benchmarks for maintaining the quality of the products or services in a company, accounting policy is also set as benchmarks to represent a sound and accurate picture of accounting practices within a company.
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Significance of accounting policies
To understand the nitty-gritty of accounting policy, first, we need to understand the significance of accounting policies.
Accounting policies are significant for the following reasons –
- Proper framework: To articulate the financial affairs of the company, it needs to prepare financial statements. And if the financial statements are just prepared without any guidance, there would be no coherence within them. They help find out the coherence between financial statements. Accounting policy also offer a solid framework to follow so that the company may adhere to the right structure and prepare its financial statements.
- Disclosure: It’s important that a company discloses what accounting policy they have been following. Since accounting standards let any item be represented in many ways, a proper disclosure of the accounting policy is important.
- Providing advantage to investors: If the companies mention the accounting policy they used to produce the financial statements, it will also help the investors. By stating the accounting policy the companies ensure that they have maintained coherence while producing the financial statements. This coherence helps the investors look at the financial statements and compare with other companies from similar and different industries.
- The government can keep a hold on the company’s financial statements: Since all the financial statements should be prepared as per the accounting policy, the companies always follow a proper structure. These companies also need to keep in mind that they can only follow the accounting policy that is made as per GAAP or IFRS. Thus, the government can have a direct hold on the company’s financial statements and government can protect the interest of the investors.
Accounting Policies Examples
All financial statements are prepared by following specific policies. Here are a couple of practical examples of accounting policies which will help us understand how the accounting policy is followed –
Accounting Policies Example #1 – Revenue Recognition
Companies follow generally accepted accounting principles to recognize revenues. Recognizing revenue for the company is important because it positively or negatively impacts the investors. For examples of accounting policies, if a company recognizes its revenue when it doesn’t make any sale; it’s not the right approach. As per the revenue recognition, a company can’t recognize its revenue until it is earned. That doesn’t mean all revenue would be in cash. In the case of credit sales, the earning is also real.
For examples of accounting policies, Company T makes credit sales and recognizes it as revenue, two things are important. First, how first Company T can collect the cash for the credit sales it has made. And secondly, when the revenue is recognized – at the time of making the credit sales or at the time of receiving cash. If a company recognizes revenue at the time of recording credit sales and if the company doesn’t receive any cash by that point, the company would be called rich in revenue, but poor in cash. Accounting policy greatly affects how revenue is being recognized in a company.
As we see from the example below, Ford recognizes its Automotive segment revenue when all the risks and rewards of ownership are transferred to customers (dealers and distributors).
source: Ford SEC Filings
Accounting Policies Example #1 – R&D Expenses
R&D Expenses – which are capitalized and which are called expenses? This is a significant consideration in financial accounting and a company needs to follow the accounting policy to recognize the expenses or the capitalization. But how it is done? R&D expenses certainly have future benefits. That’s why R&D expenses have been treated as assets rather than expenses. But when a company is expensing R&D, it doesn’t know any specific future benefits. That’s why it can’t be capitalized in most cases. Sometimes when R&D expenses have specific future benefits, it can be capitalized. As per GAAP, one should recognize R&D expenses when they’re incurred.
We note from below Apples total R&D expense was $11.6 billion and $10.0 billion in 2017 and 2016, respectively.
source: Apple SEC Filings
Also, have a look at Capitalization vs Expensing
Accounting Policies – Conservative vs Aggressive
Typically firms operate within the periphery of two extremes in regards to accounting policy.
Either a firm follows an aggressive approach or a conservative approach.
No matter what approach a company follows, it needs to reflect the same in its accounting and in the way the accounting policies are followed in preparing the financial statements.
The same will also affect the profits. An aggressive approach may end up generating more/less book profits. And a conservative approach may do the same. The company should stick to one specific approach so that the coherence is maintained.
If the company changes its approach from aggressive to conservative or from conservative to aggressive, it should be mentioned and also why it has been changing its approach for the protection of the interests of the investors.
According to International Accounting Standards 8, accounting policies are conventions, rules, procedures, principles, bases, and even practices. That means the whole framework of accounting standards in preparing and presenting the financial statements of the company can be called as accounting policies.
Accounting approach to using the accounting policy shouldn’t be based on a single transaction or event or condition. The accounting policy should be used by keeping the big picture in mind and by thinking about the preparation of financial statements and also how these financial statements would be represented to the investors.
Accounting Policies Video
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