Financial Policies

 Financial Policies

Financial policies are rules, bases, guideline for the preparation of financial statement. There are two ways of framing the financial policies i.e. international accounting standard and management judgment.

Sources of Financial Policies

1.    International Accounting Standard

First source of financial policy is international accounting standard. It is important that international accounting standard does not set financial policy, rather provide a basic guideline for policy formulation. Management can prepare a details financial policy on the bases of such guidelines.

2.    Management

Second source of financial policy formulation is management. There may be many items or circumstances which are not covered by the international accounting standard, then management can use its discretion for policy formulation.

Selection Criteria for Financial Policy

Basic selection criteria for financial policy are production of reliable & relevant information to meet the user information needs.

1.    Reliable Information

Reliable information means information which can be trusted. The financial information is used by number of user for difference economic decisions; therefore it is crucial that this information must be reliable.

2.    Relevant information

Financial policy should also provide relevant information to the user. It means financial policy should be formulated in a way that it provided that information required (relevant) to the user.

Consistency of Financial Polices

1.    Similar items

Management should use same accounting policy for similar items. For example a reducing balance policy is used for all vehicles in the organization. Management should not use reducing balance for some vehicles and fixed installment policy for other assets.

2.    No Change in Accounting policy

Management should not change the accounting policy from one period to another, because this change impairs the comparability of financial statements. In simple words in case of change in policy, the information of two cannot be compared.

3.    Change in Special Circumstances   

        

The accounting policies can only be changed when this is required by the international accounting standard, or other policy would result in more appropriate presentation. The change should be applies retrospectively i.e. all presented account must be changed accordingly.

Basic Rules of Debit Credit

Basic Rules of Debit Credit

Rules of Debit Credit of recording of transaction are

        1.    Every Debit has a Credit

First basic rule of debit & credit is two aspects every transaction one is Debit and other Credit. This rule is also expressed as every debit has a credit. This rule is more like a Newton rule that every action has a reaction. In simple term you can say that when there is debit, there will always be a credit.

       2.    Debit = Credit

Second rule Debit & credit is equal impact of debit and credit. It means debit impact of transaction is equal Credit impact. Again we can remember that every action has equal reaction, but in opposite direction. Similarly a debit effect has equal credit effect. In simple term when you debit an item with an amount, you would require to also credit another item with same amount.

      3.    Example of Recording with Basic Rules

Salary $ 200 paid in cash.

Date	Particulars	Dr.	Cr.
	Salary  a/c	$ 200
	Cash  a/c		$ 200

      4.    Specific Rules

Besides basic rules explained above, there are some specific rule for debit & credit for each element of financial statement (assets, liabilities, expense, income). An increase in asset & expenses will be debited, while a decrease in assets & expenses will be credited.

Recording of Transactions

Recording of Transactions

First step of processing of financial information is recording the financial transactions in the books of accounts. Transaction is recorded in terms of debit and credit rules. The book in which these transactions are recorded or entered is known as Journal.

Recording Rules

Transactions are recorded with help of basic rules of debit & credit and specific rules for each element. There are two basic rules for recording i.e. every transaction has debit & credit aspect. Second rule is that debit aspect of transaction is equal to credit aspect.

We can broadly classify recording of transaction into following

·         Recording Of Expenses

·         Recording of income

·         Recording Assets

·         Recording of liabilities

1.    Rules of Expenses Recording

Rule for expense recording is very simple i.e. expense is debit. More technical form of this rule is increase in expense is debit, where decrease in expense is credit. For example a salary of $ 200 paid in cash may be recorded as under;

Date	Particulars	Dr.	Cr.
	Salary  a/c	$ 200
	Cash  a/c		$ 200

2.    Rules for Asset Recording

Rules for asset recording is similar to expense recording i.e. increase in asset would be debit, while decrease in asset would be credit. For example a plant purchased for $ 500 0n cash may recorded as under

Date	Particulars	Dr.	Cr.
	Plant  a/c	$ 500
	Cash  a/c		$ 500

3.    Rules for Income Recording

Rules for income are very easy i.e. income is credit. The more technical explanation is increase in income would be credited while decrease would be debited. This rule is opposite to rule for expense. For example a sales income of $ 300 may be recorded as under

Date	Particulars	Dr.	Cr.
	Cash  a/c	$ 300
	Sale  a/c		$ 500

4.    Rules for Liability Recording

Rules for liability recording are similar to income recording i.e. increase in liability would be credit, while decrease would be debit. For example purchases on credit from saleem is recorded as under

Date	Particulars	Dr.	Cr.
	Purchases a/c	$ 400
	Saleem  a/c		$ 400