3 Best Practices for an Accounting Policies and Procedures Manual

What Is an Accounting Policies and Procedures Manual?

An accounting policies and procedures manual is a set of expectations, regulations, and best practices that an accounting team must adhere to. Accounting policies and procedures ensure that a company’s revenue, expenses, assets, liabilities, and equity statements are accurate and exhaustive, and the business and its stakeholders can be secure in their finances.

It should be noted that policies and procedures manuals are not interchangeable with standard operating procedures. SOPs are detailed instructions for company processes, whereas policies and procedures manuals provide a broader overview of a company’s governing principles and procedures.

Why Are They Important?

Accounting policies and procedures manuals standardize accounting guidelines and disseminate key information to all members of an accounting team. They improve staff performance by acting as a reference for new employees and ensuring that all staff understand the business’s internal controls. Accounting manuals may even contain standard accounting forms or templates for staff to use.

Accounting manuals also keep businesses out of legal hot water. They include regulations, auditing procedures, and tax information. For example, if a business needs to conduct annual audits, its accounting manual will go over when and how to achieve that. Furthermore, the internal controls explained in accounting manuals are designed to prevent fraud, mismanagement, mistakes, and other liabilities.

How to Make an Accounting Policies and Procedures Manual

Writing accounting policies and procedures requires more skill and resources than many expect. A company may be tempted to write its own manuals, but the longevity and success of a manual depend on the quality and clarity of the writing. For best results, manuals should be assembled by accounting team leaders and technical writers.  A technical writer ensures that a manual is optimized for its audience by distilling and organizing complex information into digestible writing.

What Accounting Policies and Procedures Should You Include?

There are two standard guides widely used by accountants: the Generally Accepted Accounting Principles and the International Financial Reporting Standards.

The Generally Accepted Accounting Principles, approved by the Financial Accounting Standards Board and the Governmental Accounting Standards Board, outline standards that all American businesses must adhere to. GAAP principles are more applicable in America, but if your business operates internationally the IFRS offers other guidelines for your list of accounting policies and procedures.

Any company’s accounting policies and procedures need to reflect the 10 GAAP principles, but policy and procedure are not themselves principles. That is to say, the GAAP principles are only a framework, whereas policy and procedure describe the processes and rules that enforce principles.

The 10 GAAP Principles

1. The Principle of Regularity: The company’s accounting policies and procedures adhere to the GAAP framework in the first place.
2. The Principle of Consistency: The company’s accounting framework is consistent across reporting periods, and any change to the framework is documented immediately and transparently.
3. The Principle of Sincerity: The company’s accounting sincerely and objectively reflects the company’s finances.
4. The Principle of Permanence of Methods: The company’s accounting practices should be consistent across reporting periods. In contrast, the Principle of Consistency emphasizes consistency in framework or standards, not practices. Again, any changes to accounting practices must be documented immediately.
5. The Principle of Non-Compensation: The company’s finances must be fully and accurately reported without the expectation of debt compensation.
6. The Principle of Prudence: The company uses conservative accounting methods. Reports are procured promptly without inflating revenue.
7. The Principle of Continuity: Financial reports should be written with the assumption that the business will continue operating for the foreseeable future.
8. The Principle of Periodicity: Financial reports should be categorized into standardized accounting periods. These accounting periods should be adhered to.
9. The Principle of Materiality: All data in accounting entries should be material, or of significant impact. Essentially, all material information or data should be transparently disclosed.
10. The Principle of Utmost Good Faith: Every member of an accounting team should strive for honesty and professional integrity.

Conservative vs. Aggressive Accounting

Conservative accounting, as referenced in the Principle of Prudence, is an especially key part of standard accounting policies and procedures. In fact, it is the standard way to operate and should form the backbone of your manual. When operating conservatively, accountants only report revenue when it is verified, and liabilities are carefully documented and taken into consideration. Generally, conservative accounting requires an accountant to choose methods that will understate the success of a fiscal period.

For example, if a company is selling a product with a market price of $100, but the market price suddenly drops to $70, that $70 must be documented as the current market cost. However, if the original $100 market price rises to $130, then the company’s documentation must still use the $100 figure. Conservative accounting dictates that a rise in market price can only be documented when the product is sold for the new, higher price.

Aggressive accounting is the opposite. It is the practice of overstating revenue and understating expenses, which may jeopardize future finances. Essentially, when reports exaggerate the success of a fiscal period, the disparity may become visible in later fiscal periods. Not only will aggressive accounting destabilize your accounting systems, but it can also be illegal. Even when legal, it’s widely frowned upon. The internal controls listed in your accounting policies and procedures manual should be designed to prevent aggressive accounting from taking place.

Internal Controls

Your accounting policies and procedures manual should also be designed with your company’s internal controls in mind. Internal controls detect and prevent fraudulent activity from occurring. They make a company’s accounting system airtight.

Preventative controls include limiting authorization of invoices and access to equipment, data verification, and generally spreading responsibility across multiple team members so that no single person is fully in charge of a process. Detective controls include data reconciliation and auditing. Internal controls cover the following issues:

1. Work environment: Controls seek to establish a workplace of sincerity, transparency, and integrity.
2. Risk Assessment: Controls enforce mechanisms to regularly measure financial risks.
3. Systems monitoring: Controls are monitored and updated as needed.
4. Integrity of information and communication: Information is trustworthy and communication methods are accessible and effective.
5. Accounting Activities: Preventative and detective mechanisms are implemented.

Get Started

An accounting policies and procedures manual establishes a foundation for how businesses should measure assets and liabilities and prevent fraud and other issues. It lists a best practices guide for employees; sets the tone for the workplace; and instills investor, shareholder, and employee confidence in their companies.

Whether you need a single technical writer for a brief project or a team of consultants to produce a complete line of documentation, the quality of our work is guaranteed for you. Our clients work closely with an Engagement Manager from one of our 30 local offices for the entire length of your project at no additional cost. Contact us at (800) 221-0093 or sales@edc.us to get started.