Accounting Standard -1 DISCLOSURE OF ACCOUNTING POLICIES (Summary)

We have written short note on Accounting Standard 1 also which can be accessed here as Notes on AS 1 and if you like to read A.S-1 Disclosure of Accounting Policies as issue by ICAI, you can read from Here.




  •         Promote better understanding of financial statements.
  •         Disclosure of significant accounting policies.
  •         Facilitate comparison between financial statement of different enterprises for same period and financial statements of same enterprises for different periods.

Accounting Policies

Accounting Policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in the preparation and presentation of financial statements. Certain areas which have more than one method of accounting treatment enforces accountant to make decision from various options for recording and disclosing.

Areas in which differing accounting policies may be adopted by different enterprises (Not an exhaustive list)

  •          Methods of depreciation, depletion and amortization
  •          Conversion or translation of foreign currency items
  •         Valuation of inventories
  •         Treatment of goodwill
  •         Valuation of investments
  •         Treatment of retirement benefits
  •          Recognition of profit on long-term contracts
  •         Valuation of fixed assets
  •          Treatment of contingent liabilities
  •          Treatment of expenditure during construction.

Fundamental Accounting Assumption

Fundamental accounting assumptions are the underling principles in the preparation and presentation of financial statements. Unless otherwise disclosed it is assumed to be complied with. Disclosure is necessary if they are not followed.

  •           Going Concern- The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation. 
  •          Consistency- It is assumed that accounting policies are consistent from one period to another.
  •          Accrual- Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Standard)

Consideration in the selection of accounting policies is that the statements prepared and presented should represent a true and fair view of the state of affairs as at the balance sheet date and of the profit. Major considerations governing the selection and application of accounting policies are—

  •         Prudence: In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.
Prudence ensures that,

·         Profits  and Assets are not overstated

·         Losses and Liabilities are not understated

Example: Valuing inventory at lower of cost and net realizable value.

Purchase – 100 units at Rs.15/unit

Sales            -60 units at Rs.20/unit

Net realizable value is Rs.12/unit

Then, the value of the unsold stock at the year end is recorded at Rs.12/unit .

i.e, 40 units at Rs.12/unit = 40*12 = 480 ; thus recognizing loss of Rs.120


  •          Substance over form: The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.

Example: With respect to Asset purchased under hire purchase scheme. The asset is shown in the books of hire purchaser irrespective of the fact that the hire purchaser is not the legal owner of the assets purchased.

  •          Materiality: Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.

 Change in Accounting Policies

Accounting policies should be consistent from one period to another. However, change in accounting policy is allowed on following conditions-

  •          Requirement of statute
  •          Compliance of Accounting Standard
  •           Better presentation of financial statement.

Disclosure :
Accounting Standard 1 AS

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