DISCLOSURE OF ACCOUNTING POLICIES (AS-1)

MEANING:-- Accounting policies refer to specific accounting principles and the method of

applying those principles adopted by the enterprise in preparation and presentation of the

financial statements. Examples Methods of Depreciation, Valuation of inventories, Valuation of

Investment ,Treatment of Retirement Benefits ,Valuation of Fixed Assets ,Treatment of

Contingent Liabilities etc

NEED FOR DISCLOSURE OF ACCOUNTING POLICIES

There are many areas, where more than one method can be followed for accounting. Which

methods have been followed in preparation of Balance Sheet, profit and loss account is

disclosed as accounting policies. Hence accounting policies contains the information about the

method adopted for the preparation of financial statement. Statements of accounting policies

are part of financial statement. For proper and better understanding of financial statement, it

is required that all significant accounting policies followed in preparation of financial

statement should be disclosed. Because assets and liabilities in balance sheet and profit and

loss account are significantly affected by accounting policies followed. All significant accounting

policies should be disclosed at one place because it would be helpful to the reader of financial

statement.

SELECTION OF ACCOUNTING POLICIES

Major points which are considered for the purpose of selection and application of accounting

policies

 Prudence - Generally maker of financial statement has to face uncertainties at the time

of preparation of financial statement. These uncertainties may be regarding

collectability of receivables, number of Warranty claims that may occur. Prudence

means making of estimates, which is required under conditions of uncertainty.

 Substance over form - It means that transaction should be accounted for in accordance

with actual happening and economic reality of the transactions not by its legal form.

Like in hire purchase if the assets are purchased on hire purchase by the hire purchaser

the assets are shown in the books of hire purchaser in spite of the fact that the hire

purchaser is not the legal owner of the assets purchased. Under the hire purchase the

purchaser, becomes the owner only on the payment of last Installment. Therefore the

legal form of the transaction is ignored and the transaction is accounted as per its

substance.

 Materiality- Financial Statement should disclose all the items and facts which are

sufficient enough to influence the decisions of reader or/user of financial statement.

CHANGES IN ACCOUNTING POLICIES

A change in accounting policies should be made in the following conditions:

 Adoption of different accounting policies is required by statute or

 for compliance with an Accounting Standard ,or

 It is considered that change would result in more appropriate presentation of financial

statement.

(I) Fundamental Accounting Assumptions :It is generally assumed that financial statements are

prepared on the basis of fundamental accounting assumptions. Fundamental Accounting

assumptions are:

 Going Concern- It means that enterprise had intention for continuing the operation in

foreseeable future. Foreseeable means coming one or two years. In other words,

neither there is intention of discontinuance of business, nor necessity of liquidation of

organization or discontinuance of major operations of the business.

 Consistency - It means that same accounting policies are followed from one period to

another.

 Accrual- It means that financial statement is prepared on mercantile system only. Other

accounting assumption like business entity, money measurement, matching are not

accounting assumptions as per this accounting standard.

Assumption regarding fundamental accounting assumptions :If nothing has been written

about the fundamental accounting assumption in financial statements, it is assumed that

fundamental accounting assumptions have been followed in preparation of financial

statements. If any fundamental accounting assumption has not been followed, then this fact

must be disclosed in financial statements.

(II) Notes to Accounts

Notes to accounts are the explanation of the management about the items in the financial

statements (Profit & Loss Account and Balance Sheet). The management gives explanation and

information about the items of profit and loss account and balance sheet and any other items,

by way of notes to accounts.