Accounting policies refer to the specific principles, rules, methods, and practices that a business follows to prepare and present its financial statements. In the Indian context, these policies are framed in line with the Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI) and are critical for ensuring consistency, comparability, and transparency in financial reporting.
Every business has some flexibility in choosing how to treat certain accounting matters—such as how to value inventory or depreciate fixed assets. The set of rules it chooses and consistently applies become its accounting policies. These policies directly affect how financial results are reported, making them an important part of internal decision-making and external compliance.
For small businesses and startups, understanding and documenting their accounting policies is essential. This becomes especially relevant during statutory audits, income tax filings, or while applying for loans and registrations. For instance, if a business applies different depreciation methods in different years without disclosure, it may raise red flags during assessments.
Well-defined accounting policies help ensure that the company’s books of accounts present a true and fair view of its financial health. They are typically disclosed in the notes to financial statements and must be consistently followed unless a valid reason for change is stated. Any change in accounting policies must also be disclosed and justified in the financial statements.
Choosing appropriate accounting policies is not just about compliance—it also helps build investor confidence, streamline operations, and simplify decision-making. Whether you’re preparing your first set of books or managing a growing enterprise, it’s wise to consult an accountant or tax expert to define and apply suitable accounting policies for your business.