Why do businesses need an accounting policy? As a matter of fact, it is not a tricky or rhetorical question. An accounting policy is an essential tool which is necessary for financial and audit departments. However, it is equally as important for executives. Why? Because a well-developed accounting policy helps to keep account books in an orderly manner and makes the process of preparing financial statements much easier and smoother. And this "event" repeats itself, year after year.
What exactly is an accounting policy?
An accounting policy is somewhat of an instruction manual for those who are responsible for preparing financial statements, a reliable point of reference which is up-to-date regardless of changes in staff. If formulated properly, it works as a "roadmap", clearly indicating how to prepare the financial statements of a particular company without error.
It is also worth noting that an accounting policy acts as a guidebook for accounting teams, therefore, employee turnover or dismissals are not "burdensome". A new employee or temporary accountant hired as staff replacement does not have to guess what principles are adopted by the company, as they are clearly described in one place. This will, consequently, reduce onboarding time and minimise the risk of errors resulting from conflicting interpretations.
So, to save yourself from nerve-racking situations during the next visit of a statutory auditor in your company, pay close attention to that issue.
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What may typically raise an auditor's concerns when examining financial statements?
General guidelines concerning accounting entries (and, as a consequence, unrestricted use of transaction descriptions) may often lead to a situation in which an incomprehensible description of a transaction makes it impossible to determine its type. As a result, it may be wrongly classified in the system, causing financial statement errors in extreme cases.
If the accounting records are properly described (in clear narratives or by means of transaction codes or abbreviations assigned to specific transaction types), as set out in Article 23(2)(3) of the Polish Accounting Act, then both bookkeeping and subsequent auditing are simpler and the risk of errors greatly reduced. Obviously, in both cases, it is important to make the narratives comprehensible and to define the abbreviations and codes in the accounting policy.
Keeping this in order (together with preparing transaction descriptions) makes it possible to enter data in a specific pattern which all users understand, allowing for quicker compilation of financial reports for business, among other things.
What other recommendations may accompany an auditor's opinion?
Different industries and business models present various bookkeeping challenges for companies, e.g. valuation of work in progress, method of recognition of revenues from long-term agreements, or record of leases or assets under construction. A well-formulated accounting policy contains concrete solutions to address such situations, adjusted to the specifics of a given entity.
An accounting policy should not merely replicate the provisions of the Accounting Act. Its main function is to provide clear and practical guidelines to the persons responsible for bookkeeping and preparing financial statements, in particular considering the nature of a given entity. A correct accounting policy acts as a roadmap, facilitating coherent decision-making in bookkeeping, in line with the adopted approach. As such, it should be shaped in a "tailor-made" manner for every organisation.
It is worth noting that formulating the accounting principles (policy) falls within the responsibility of the management board. Thus, it is in the best interest of the executives to ensure that the policy is up-to-date, transparent, and enables the application of the consistency principle. Precise and repeatable accounting data are the foundation of accurate financial statements as well as the basis for making informed business decisions. Consistent application of the accounting principles makes it possible for the management to have access to information which is reliable and comparable over time. And then, not only will managing the business affairs be easier, but also the meetings with the statutory auditor who carries out the audit of the financial statements will become more effective.