Difference between Accounting Principles And Accounting Policies
Policies are the norms, rules, directions, methods that a business decides for themselves. Policies are not universal, they can differ from one organization to another. Accounting policy for an organization basically defines “their” way of accounting for transactions.
For example, I can decide that I am going to charge depreciation on the straight line method. Some other company can decide to charge it using the written down value method. That company has it’s own ‘policy’ of charging depreciation, which is different than my ‘policy’.
But accounting policies cannot be arbitrary or random. For example, I cannot randomly say that I will charge depreciation based on the card that my parrot picks from the deck of cards! Even though accounting policies can differ from person to person, they still have to fall within an overall framework in order to be acceptable.
That framework is defined by accounting “principles”.
For example, “matching” is a principle. As per this accounting principle, the costs should be matched with the benefits. Hence, if you purchase an asset for $100 million, you should not charge all of that to your cost in the first year itself, and should match it with the benefits that the asset will generate over time. Hence, we should depreciate the asset over time.
So, accounting principle tells us that costs should be matched with benefits. Based on this principle, I can decide that my benefits will flow in a straight line, and hence I charge depreciation in a straight line method. But, I could also say that the benefits will be higher in the starting years, which is why I charge depreciation using the written down value method.
The point is - accounting principles are like guiding lights. They can tell you the broad direction (‘go North, not South’), but then using this broad direction, you need to decide the exact way yourself (one person could ‘go North’ using ships, while the other could ‘go North’ on a horse).
The ‘ships’ or ‘horses’ are like accounting policies, but ‘go North’ is the principle. The principle is same for all, the policies could differ between organisations, but should still follow the principle broadly.
But accounting policies cannot be arbitrary or random. For example, I cannot randomly say that I will charge depreciation based on the card that my parrot picks from the deck of cards! Even though accounting policies can differ from person to person, they still have to fall within an overall framework in order to be acceptable.
That framework is defined by accounting “principles”.
For example, “matching” is a principle. As per this accounting principle, the costs should be matched with the benefits. Hence, if you purchase an asset for $100 million, you should not charge all of that to your cost in the first year itself, and should match it with the benefits that the asset will generate over time. Hence, we should depreciate the asset over time.
So, accounting principle tells us that costs should be matched with benefits. Based on this principle, I can decide that my benefits will flow in a straight line, and hence I charge depreciation in a straight line method. But, I could also say that the benefits will be higher in the starting years, which is why I charge depreciation using the written down value method.
The point is - accounting principles are like guiding lights. They can tell you the broad direction (‘go North, not South’), but then using this broad direction, you need to decide the exact way yourself (one person could ‘go North’ using ships, while the other could ‘go North’ on a horse).
The ‘ships’ or ‘horses’ are like accounting policies, but ‘go North’ is the principle. The principle is same for all, the policies could differ between organisations, but should still follow the principle broadly.
