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Mastering Accounting Policies: Definitions, Selection, and Changes | Comprehensive Guide

6.1   MEANING OF ACCOUNTING POLICIES Accounting Policies refer to specific accounting principles and methods of applying these principles adopted by the enterprise in the preparation and presentation of financial statements. Policies are based on various accounting concepts, principles and conventions that have already been explained in Unit 2 of Chapter 1. There is no single list of accounting policies, which are applicable to all enterprises in all circumstances. Enterprises operate in diverse and complex environmental situations and so they have to adopt various policies. The choice of specific accounting policy appropriate to the specific circumstances in which the enterprise is operating, calls for considerate judgement by the management. ICAI has been trying to reduce the number of acceptable accounting policies through Guidance Notes and Accounting Standards in its combined efforts with the government, other regulatory agen...
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What is Accounting ? Learn in Simple Language


1.1 INTRODUCTION


Every individual performs some kind of economic activity. A salaried person gets salary and spends to buyprovisions and clothing, for children’s education, construction of house, etc. A sports club formed by a group ofindividuals, a business run by an individual or a group of individuals, a local authority like Calcutta MunicipalCorporation, Delhi Development Authority, Governments, either Central or State, all are carrying some kind ofeconomic activities. Not necessarily all the economic activities are run for any individual benefit; such economicactivities may create social benefit i.e. benefit for the public, at large. Anyway such economic activities areperformed through ‘transactions and events’. Transaction is used to mean ‘a business, performance of an act,an agreement’ while event is used to mean ‘a happening, as a consequence of transaction(s), a result.’An individual invests` 2,00,000 for running a stationery business. On 1st January, he purchases goods for` 1,15,000 and sells for ` 1,47,000 during the month of January. He pays shop rent for the month ` 5,000 andfinds that still he has goods worth ` 15,000 in hand. The individual performs an economic activity. He carrieson a few transactions and encounters with some events. Is it not logical that he will want to know the result of hisactivity?

We see that the individual, who runs the stationery business, earns a surplus of ` 42,000.

Earning of ` 42,000 surplus is an event; also having the inventories in hand is another event, while purchase andsale of goods, investment of money and payment of rent are transactions.Similarly, a municipal corporation got government grant ` 500 lakhs for adult education; it spent ` 250 lakhs forpurchasing literacy kits, paid ` 200 lakhs to the tutors and is left with a balance of ` 50 lakhs. These are alsotransactions and events.Similarly, the Central Government raised money through taxes, paid salaries to the employees, and spent onvarious developmental activities. Whenever receipts of the Government are more than expenses it has surplus,but if expenses are more than receipts it runs in deficit. Here raisingmoney through various sources can be termedas transaction and surplus or deficit at the end of the accounting year can be termed as an event.So, everybody wants to keep records of all transactions and events and to have adequate information about theeconomic activity as an aid to decision-making. Accounting discipline has been developed to serve this purposeas it deals with the measurement of economic activities involving inflow and outflow of economic resources, whichhelps to develop useful information for decision-making process.Accounting has universal application for recording transactions and events and presenting suitable informationto aid decision-making regarding any type of economic activity ranging from a family function to functions of thenational government. But hereinafter we shall concentrate only on business activities and their accountingbecause the objective of this study material is to provide a basic understanding on accounting for businessactivities. Nevertheless, it will give adequate knowledge to think coherently of accounting as a field of study foruniversal application.The growth of accounting discipline is closely associated with the development of the business world. Thus, tounderstand accounting as a field of study for universal application, it is best identified with recording of businesstransactions and communication of financial information about business enterprise to facilitate decision-making.The aimof accounting is tomeet the information needs of the rational and sound decision- makers, and thus, calledthe language of business.

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