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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.29

1.18 Accounting Policies

Accounting policies are specific accounting principles and methods of applying these prin-
ciples adopted by the entity in the preparation and presentation of financial statements.

1.18.1 Selection of Accounting Policies

Accounting policy choice is an important policy decision which affects the financial posi-
tion as well as performance measurement of the business entity. Inappropriate selection
of accounting policy may lead to understatement or overstatement of financial position
and performance.
The financial statements should be prepared on the basis of such accounting policies,
which exhibit true and fair view of state of affairs of balance sheet and the profit and
loss account.

The selection of accounting policies is depicted as in Fig. 1.10.

Selection of Accounting Policies

Based on

Substance
Prudence
over Form

Materiality

Fig. 1.10 Basis for Selection of Accounting Policies

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