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Glossary/Accounting and GAAP

Accounting policies

Accounting policies are the specific principles and methods management selects to prepare financial statements, such as how revenue is recognized or inventory costed, and GAAP requires them to be disclosed in the notes.

CORAA TeamUpdated November 5, 2026

Definition

Accounting policies are the specific accounting principles and methods of applying them that management judges most appropriate to present financial position, results and cash flows fairly. Examples are revenue recognition, inventory costing, depreciation methods, lease and credit loss accounting, and consolidation principles. ASC 235-10-50-1 states that a description of all significant accounting policies is an integral part of the financial statements, usually placed in the first note.

Why it matters in an audit or review

Auditors obtain an understanding of the entity's accounting policies under AU-C 315 and evaluate whether they are appropriate and consistently applied under AU-C 700. Policies that depart from GAAP, changed during the year, or are unusual for the industry can be sources of misstatement. The note should be specific rather than boilerplate.

Example

Illustrative: a distributor states that it values inventory at the lower of average cost and net realizable value, and recognizes product revenue when control passes at shipment. The team compares the wording with how the accounting system actually processes sales and costs.

Common mistakes

  • Copying a prior-year policy note after a change in practice.
  • Leaving out judgments, such as the basis for the allowance for credit losses.

Sources

  • FASB ASC 235-10-50, Notes to Financial Statements, Overall, Disclosure (including 235-10-50-1 and 50-3)
  • AICPA, AU-C Section 315, Understanding the Entity and Its Environment (understanding the applicable financial reporting framework and accounting policies)
  • AICPA, AU-C Section 700, Forming an Opinion and Reporting on Financial Statements

Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error

Standards

ASC 235-10AU-C 315AU-C 700

Related terms

  • Change in accounting principle vs estimate
    A change in principle is applied retrospectively and needs a preferability justification, while a change in estimate is applied prospectively in the period of change and future periods under ASC 250.
  • Accounting estimate
    An accounting estimate is a monetary amount in the financial statements that cannot be measured precisely and depends on judgment, such as an allowance or fair value, and carries estimation uncertainty and bias risk.
  • Cash basis accounting
    Cash basis accounting records revenue when cash is received and expenses when cash is paid; it is not US GAAP, but can serve as a special purpose framework with proper disclosure.
  • Special purpose framework (OCBOA)
    A special purpose framework is a financial reporting basis other than GAAP, such as cash, tax, or regulatory basis, designed to meet the needs of specific users and audited under AU-C 800.

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