Accounting policies are specific accounting bases selected and consistently followed by a business.Allowing businesses to make choices on the use of accounting policies may lead to withholding information from the accounts to ensure that the figures appeal to stakeholders. This can be perceived as a potential weakness of accounting policy choices as businesses may have to cease all trading activities and employees will lose their jobs so this can affect stakeholders.
Accounting policy choices ensure organizations include the right information in the notes to the accounts so that stakeholders are satisfied with the quality of information which will influence their decisions. Hence, a shareholder’s decision to invest in a business may depend on the value of a business’s fixed assets and whether they can be easily converted into cash if the business experiences a difficult trading period. Accounting policy choices also provide businesses with the opportunity to make choices about what accounting policies to implement.
By increasing an asset’s residual value to make it seem higher, stakeholders will be convinced that the business is liquid. Accounting policies may be changed through altering stock valuation methods to allow for better figures which satisfy the stakeholders. The straight line method is commonly used in the UK and the depreciation amount is spread equally over each accounting period when the asset is used. The reducing balance method applies “a percentage to the asset’s cost”.
To conclude, accounting policy choices are included in the notes to the accounts and provide businesses with flexibility in decision making on what depreciation or stock valuation methods to use. The notes to the accounts are important to stakeholders who rely on the information to make decisions, such as whether or not to invest in a business.
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