Every business follows certain rules while preparing its financial statements — like how it values stock, when it records expenses, or how it treats fixed assets.
These rules are known as Accounting Policies, and AS 1 ensures that these policies are clearly disclosed so that financial statements become transparent, comparable, and reliable.
In simple words: AS 1 tells us — “Don’t hide how you made your accounts!”
Objective of AS 1
The main objective of AS 1 is:
“To ensure that significant accounting policies adopted in preparing and presenting financial statements are properly disclosed.”
Meaning of Accounting Policies
Accounting Policies are the specific principles, bases, conventions, rules, and practices applied by an enterprise in preparing and presenting financial statements.
Examples of Accounting Policies:
- Method of depreciation (Straight Line or WDV)
- Valuation of inventory (FIFO or Weighted Average)
- Treatment of goodwill (amortized or tested for impairment)
- Recognition of revenue (on delivery or completion basis)
Key Concepts Behind AS 1
While choosing accounting policies, a business must consider three fundamental assumptions and three major principles.
Fundamental Accounting Assumptions
These are basic assumptions that are usually not disclosed unless they are not followed.
- Assumption Meaning
- Going Concern Business will continue operating in the foreseeable future.
- Consistency Same accounting policies should be used from one period to another.
- Accrual Record income and expenses when they are earned or incurred, not when cash is received or paid.
If any of these are not followed, it must be clearly disclosed.
Major Principles to Follow
While selecting policies, management should keep these in mind:
- Principle Description
- Prudence (Conservatism) Don’t anticipate profits, but provide for all known losses.
- Substance Over Form Record transactions based on their real nature, not legal form.
- Materiality Disclose all significant information that can influence users’ decisions.
Disclosure Requirements under AS 1
An enterprise should disclose:
- All significant accounting policies used in preparing the financial statements.
- Such disclosure should be made at one place (usually in the Notes to Accounts).
- If there is any change in policy, the effect of such change on the current period’s profit/loss must be disclosed.
Example:
Scenario:
In Year 1, a company uses the Straight Line Method (SLM) for depreciation.
In Year 2, it switches to the Written Down Value (WDV) method.
Disclosure should mention:
“Depreciation method has been changed from SLM to WDV during the year.
The change has resulted in an additional charge of ₹2,00,000 to the Profit & Loss Account.”
This maintains transparency and comparability.
When a Change in Accounting Policy is Allowed
A company can change its accounting policy only if:
- It is required by law or by another Accounting Standard, or
- The new policy provides more appropriate presentation of financial statements.
Otherwise, frequent changes will confuse users and make statements unreliable.
Common Mistakes Students Make
- Confusing “Accounting Policies” with “Accounting Estimates.” [Policy = Rule, Estimate = Amount.]
- Forgetting to mention disclosure requirement in exam answers.
- Ignoring “fundamental assumptions” — a favorite exam area!
Quick Summary Table
- Particular AS 1 Summary
- Name Disclosure of Accounting Policies
- Objective To ensure transparency in financial statements
- Fundamental Assumptions Going Concern, Consistency, Accrual
- Principles Prudence, Substance over Form, Materiality
- Disclosure All significant policies must be disclosed at one place
- Change Allowed When Required by law / better presentation
- Exam Tip Always mention 3 assumptions + 3 principles
Exam Tip
In CA Foundation & Intermediate papers, AS 1 questions are often:
- Short notes (4 marks): “Explain the concept of Going Concern.”
- Case-based (6 marks): “Company changes depreciation method — what disclosure is needed?”
- Always start your answer with definition + objective + example → guaranteed good impression!
Motivational Note
“Accounting Standards are not just rules — they are the grammar of financial language.
Master them once, and you’ll speak accounting fluently forever.” – CA Rohit Sethi
Upcoming: [AS 2 – Valuation of Inventories Made Easy] — coming up next week!
