An “accounting disclosure” is a statement that recognizes the financial policies of a firm or business. This statement shows expenses and profits over a duration of time. An accounting policy statement is disclosed for both the present investors in the business and for potential investors. These policies are the strategies and methods of accounting that are followed in the business. This disclosure also includes Financial Statements that comprise balance sheets, income statements, cash flow statements, and the statement of stockholder’s equity.
The main principle and purpose of disclosure of accounting policies are to disclose any affair or event that influenced any financial statements. The business incorporates a legal system, and, for most legal systems, it is a requirement in most countries to disclose its policies and notices. Many countries have developed laws and established guidelines on how and when the accounting disclosures have to be made. Companies release this information in their compiled form of annual reports. These disclosures are also made into other publications other than annual reports. It is compulsory by law and regulators to disclose accounting policies to the business’s shareholders and stockholders. Such disclosures are essential for potential investors to decide on investment in the business or corporation.
The overall exhibition of an accounting disclosure includes:
- Financial statements
- Balance sheet
- Cash flow statement
- Equity in stockholders or changes made to it, if any
- Retained earnings
- Assets (current assets, financial assets, and investments, fixed assets, intangible assets) in the balance sheet
- Any change in paid-up capital
- Continuing Operations and their results
- Net sale
- Total profit and loss, if any
Importance of an Accounting Policy
An accounting policy is essential for a company or business’s success because many accounting standards allow alternative treatments for the same transaction in bookkeeping. Financial statements can be compared with other entities when all accounting policies are clearly outlined and shown.
An accounting policy disclosure helps to prevent loss. It also helps in preventing the misuse of assets.
Potential investors can study available accounting policies to decide if they will invest in the business or not. Net profits, assets, continuing operations, equities, and accounting statements are all influenced by its policies.
Internal control policy
In this policy, a separate person is required for another step of the bookkeeping. For instance, the one that handles the money is not responsible for bookkeeping them in an accounting system.
Who requires Accounting Policies?
The auditing of financial statements includes accounting policies. It helps in many ways. A retail business can adopt an approach of the “First In, First Out” method as a policy on inventory and sales. This principle of first in first out is crucial for retail businesses such as food and medicine. It will save losses in the case of expired products.
Any policy made internally and adopted must be appropriately disclosed in the footnotes of financial statements.
Accounting principles are a method to study whether a particular company or corporation’s administration is conservative or not reporting earnings.
International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) require that all accounting policies be disclosed and open. This legal requirement is compulsory to be made and publicized. This allows transparency in the system and helps in maintaining a standard reporting format. Standardization in reporting allows comparing a company/business with other businesses of its kind. It eases the process of comparing similar companies in the same industry. It gives a precise financial position of a company to its readers.