From this article, you will learn:
- Accounting policy – what it is and who is required to have it
- The most important principles of accounting policy
- Accounting policy – its significance for a business and the consequences of its absence
- Summary
Accounting policy – what it is and who must have it
Accounting policy – what is it? It is a comprehensive set of rules and guidelines that an enterprise follows in maintaining its accounting books and preparing financial statements. This document defines methods for valuing assets and liabilities, the way of documenting business transactions, and principles for inventorying assets. Accounting policy serves as a kind of guide to the company’s financial procedures, ensuring consistency and continuity in recording business events.
Accounting policy also plays a key role in the preparation of financial statements. Without clearly defined principles for valuation, transaction recognition, and inventory, preparing reliable statements is practically impossible. For this reason, many companies utilize professional support when creating their accounting policy and in preparing consolidated financial statements.
The obligation to maintain documentation describing the accounting policy applies to all entities keeping accounting books in accordance with the Accounting Act. In particular, this includes commercial companies, legal persons, as well as individuals, civil partnerships, general partnerships, and professional partnerships, if their net revenues for the previous financial year exceeded the equivalent of 2 million euros. The responsibility for preparing and updating this document lies with the head of the entity – usually the management board or the owner of the company.
It is worth emphasizing that accounting policy is not a static document. It should be updated in line with changes in regulations and the development of the enterprise. A well-constructed accounting policy reflects the specifics of the industry and the nature of the company’s operations, which allows for faithful representation of its financial position in the statements. Regular verification of applied procedures ensures their compliance with current regulations and enhances the reliability of the reporting conducted.
The most important principles of accounting policy
The fundamental principle of accounting policy is the principle of true and fair view. This means that the information contained in financial statements should accurately present the entity’s financial and asset situation. To achieve this, KR Group recommends applying several key principles that form the basis of a properly functioning accounting system. Consistent implementation of these principles not only ensures compliance with regulations but also increases process transparency and facilitates informed business decision-making.
Another important principle included in accounting policy is the principle of continuity. This requires the consistent application of adopted methods, which allows for comparison of financial data across reporting periods. Changes to the adopted principles are only possible from the beginning of the financial year, with a requirement to disclose their impact on the financial result. The accrual principle, on the other hand, mandates recognizing all revenue earned and costs incurred in the period to which they relate, regardless of the timing of payment.
The basic accounting policy includes principles such as:
- Prudence principle – requiring consideration of decreases in asset values and all liabilities in the financial result, even if their exact amount is not yet known
- Materiality principle – allowing the use of simplifications if they do not significantly affect the reliability of the financial statements
- Going concern principle – assuming that the entity will continue its operations in the foreseeable future
- Matching principle – requiring the allocation of revenues and costs to the appropriate reporting periods
Implementation of these accounting policy principles requires professional knowledge and experience. Therefore, many companies choose to collaborate with professional advisors when creating this document.
Accounting policy – its significance for a business and the consequences of its absence
A properly developed accounting policy and principles constitute the foundation of a company’s financial security. This document not only ensures compliance with legal regulations but also streamlines management processes by providing reliable information about the enterprise’s economic situation. Managers who base their decisions on properly maintained accounting can more effectively plan investments, control costs, and optimize cash flows.
The absence of, or improperly prepared, documentation describing accounting policy and principles can lead to serious consequences. In the event of a tax audit, irregularities in bookkeeping may result in severe financial penalties. Additionally, unclear accounting principles make it difficult to assess the company’s financial condition, which may negatively affect relationships with banks, investors, or business partners. In extreme cases, this can even lead to criminal liability of the management board.
Many enterprises choose to outsource accounting to ensure professional bookkeeping in accordance with current regulations. Equally important is the use of tax advisory services, which allows for optimization of fiscal burdens while maintaining full compliance with applicable law. Accounting policy and principles developed by experts take into account both legal requirements and industry specifics as well as the individual needs of the enterprise.
Summary
You now know what accounting policy is. It is an essential element for the proper functioning of an enterprise in the financial area. This document, which defines the rules for bookkeeping and the preparation of financial statements, must be tailored to the specifics of the business and comply with current legal regulations. Properly developed accounting policies ensure the reliability of financial information, which translates into better business decisions and reduced risk of conflicts with tax authorities. Professional support is recommended when creating or updating this key document.
