Accounting policies are the backbone of a company's financial accounting and reporting processes. Senior corporate leaders ensure these policies conform to industry standards, including U.S. generally accepted accounting principles, or GAAP, and international financial reporting standards, or IFRS. Corporate accountants also abide by Securities and Exchange Commission (SEC) rules when preparing financial reports.
Revenue and Expense Recognition
A company records, or recognizes, revenue and expense items at market values, in accordance with U.S. GAAP and IFRS. Revenue is income that a company generates by selling goods and providing services. Revenue items include sales, interest income, short-term profits and long-term gains on investments. An expense is a cost or loss that a firm incurs when selling goods or providing services. Examples of expense items include salaries, utilities and cost of goods sold. A corporate accountant debits an expense account to increase its amount and credits it to reduce the account balance. The opposite is true for a revenue account. A firm lists revenue and expense accounts in its statement of profit and loss (P&L) at the end of a period, such as a month or quarter.
Asset and Liability Recording
Accounting rules and regulatory guidelines require a corporation to record assets and liabilities at fair market amounts. An asset is an economic resource that a company owns, and it can be a short-term or long-term resource. A short-term, or current, asset is a resource that a firm can convert into cash within 12 months. Examples of short-term assets are cash, inventories and accounts receivable. A long-term fixed asset is a resource that a company can use for more than a year. Fixed assets may be land, property, a plant, equipment and machines. A liability is a debt that an organization must repay at a given point in time or over specified installments. A borrower must repay a short-term loan within a year and a long-term debt after a year or more. A bookkeeper debits an asset account to increase its amount and credits it to reduce the account balance. The opposite is true for a liability account. A company lists asset and liability accounts in the balance sheet.
A company reports periodic financial statements that are complete, "fair" and conform to U.S. GAAP, IFRS and SEC rules. In accounting or finance parlance, "fair" means accurate or objective. Complete financial reports include a balance sheet (also referred to as statement of financial position), statement of income (P&L), statement of cash flows and statement of retained earnings (otherwise known as statement of equity).