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Advanced Accounting · AS 1 Disclosure of Accounting Policies

AS 1 Scope, Meaning and Definitions of Accounting Policies

Updated 4 October 2026 · Fact-checked

AS 1 requires you to disclose the significant accounting policies used to prepare financial statements. Accounting policies are the specific principles, bases, conventions, rules and practices an enterprise adopts. They are different from accounting estimates, which are approximations of uncertain amounts. To answer questions, define the term, give an example, and separate policy from estimate.

Understand AS 1 Scope, Meaning and Definitions of Accounting Policies

Every enterprise must choose how to record and report its transactions. Should stock be valued on FIFO or weighted average? Should fixed assets be depreciated on straight line or written down value? These choices change the reported profit. AS 1 exists so that a reader of the accounts knows which choices were made.

The Standard deals with the disclosure of significant accounting policies. Its purpose is to promote better understanding of financial statements and to make comparison between enterprises easier. It requires that the policies followed be disclosed in one place, as part of the financial statements, and not scattered or hidden.

An accounting policy is the specific accounting principles and the methods of applying them that an enterprise adopts in preparing and presenting financial statements. Think of it as the enterprise's chosen rulebook. Examples: the method of depreciation, the cost formula for inventories, the basis for revenue recognition, the treatment of foreign currency items, and the valuation of investments.

An accounting estimate is different. A policy is the method you choose. An estimate is the figure you work out using judgement where the real amount is uncertain. Examples: the useful life of a machine, the provision for doubtful debts, the expected residual value. Choosing straight line is a policy. Saying the machine lasts 8 years is an estimate.

Also keep the financial statements separate in your mind. They are the output: balance sheet, statement of profit and loss and related statements. Policies are the rules applied to produce them. AS 1 requires the policies to be disclosed along with the statements, and it applies to all enterprises that prepare financial statements to the extent the Standard is applicable to them.

Key rules to remember

Definition of accounting policies
Accounting policies = specific accounting principles + methods of applying them, adopted in preparing and presenting financial statements
Write this in your own words in the exam. Add two examples to earn full marks.
Policy versus estimate
Policy = the method chosen; Estimate = the uncertain amount judged using that method
Example: WDV depreciation is a policy; a 5-year life is an estimate.
Where policies are disclosed
Significant accounting policies are disclosed in one place, as part of the financial statements
Disclosure is required for significant policies, not every trivial one.
Three fundamental assumptions
Going concern, consistency, accrual
If followed, no separate disclosure is needed. If not followed, the fact must be disclosed.

How to solve AS 1 Scope, Meaning and Definitions of Accounting Policies questions

Use this method for any theory or case question on AS 1 scope and definitions.

  1. 1Read the question and decide what is asked: definition, purpose, classification of an item, or difference between terms.
  2. 2If an item is given, ask: is it a method or principle chosen by the enterprise, or an amount worked out with judgement?
  3. 3Label a method or principle as an accounting policy and an uncertain amount as an accounting estimate.
  4. 4Check whether the item is something in the financial statements themselves, such as a balance or a figure. That is not a policy.
  5. 5State the definition from AS 1 in your own words.
  6. 6Support the label with a one-line reason and, where possible, a practical example.
  7. 7Conclude clearly, for example: 'Hence, this is an accounting policy and must be disclosed if significant.'

Quickest way: Method or amount test

When to use it: For MCQs asking you to classify an item as a policy or an estimate, and for short written answers.

  1. Ask: 'Is this HOW we account, or HOW MUCH?'
  2. HOW (method, basis, formula such as FIFO, straight line, percentage of completion) means policy.
  3. HOW MUCH (useful life, bad debt provision, residual value, fair value guess) means estimate.
  4. In MCQs, eliminate options that call a balance sheet figure a policy.
  5. In written answers, use three lines: definition, example, conclusion. Each line earns marks.

Common mistakes in AS 1 Scope, Meaning and Definitions of Accounting Policies

  • Treating useful life of an asset as an accounting policy.

    It sits next to depreciation, which is a policy area, so students lump both together.

    Fix: Method of depreciation is the policy. Useful life and residual value are estimates.

  • Saying accounting policies and financial statements are the same thing.

    Both appear in the same chapter and are disclosed together.

    Fix: Financial statements are the output. Policies are the rules applied to produce them.

  • Believing every policy must be disclosed in detail.

    Students remember 'disclosure' and ignore 'significant'.

    Fix: AS 1 requires disclosure of significant accounting policies, those that matter to a reader's understanding.

  • Writing the definition without any example.

    Students memorise the line and stop.

    Fix: Always add two examples such as inventory valuation method and depreciation method.

  • Thinking policies may be disclosed anywhere in the annual report.

    Confusion with directors' report and other notes.

    Fix: Policies are disclosed in one place as part of the financial statements.

Worked examples

Example 1

Classify each of the following as an accounting policy or an accounting estimate under AS 1 principles: (a) valuing inventory on weighted average cost; (b) provision for doubtful debts at 5% of debtors; (c) charging depreciation on written down value method; (d) expected useful life of a machine as 10 years.

Show the solution
  1. Apply the test: method means policy, amount judged means estimate.
  2. (a) Weighted average is a cost formula chosen by the enterprise. It is a policy.
  3. (b) The 5% rate is a judgement of uncertain losses. It is an estimate.
  4. (c) Written down value is a method of depreciation. It is a policy.
  5. (d) Ten years is a judgement about future use. It is an estimate.

Answer: (a) and (c) are accounting policies. (b) and (d) are accounting estimates.

Example 2

Explain the meaning of accounting policies as per AS 1 and distinguish them from accounting estimates, with examples.

Show the solution
  1. Define: accounting policies are the specific accounting principles and methods of applying them that an enterprise adopts in preparing and presenting financial statements.
  2. Give examples: method of depreciation, cost formula for inventories, basis of revenue recognition.
  3. Define estimates: approximations of amounts that cannot be measured precisely and need judgement.
  4. Give examples: useful life of an asset, provision for doubtful debts.
  5. Distinguish: a policy is a chosen method applied consistently, while an estimate is an amount that may be revised as new information arises.
  6. Add the link: policies are disclosed as significant accounting policies, along with the financial statements, so readers can understand and compare.

Answer: Accounting policies are the chosen principles and methods used to prepare financial statements, such as FIFO or straight line depreciation. Accounting estimates are judged amounts, such as useful life or bad debt provision. The policy is the method, and the estimate is the figure produced with judgement.

Exam tips

  • Learn the definition of accounting policies in your own words and always add two examples.
  • In MCQs, use the 'how or how much' test to classify items quickly.
  • For a difference question, write at least three points in two columns of thought: nature, example and effect of change.
  • Remember that policies are disclosed when significant, and that the three fundamental assumptions need disclosure only if not followed.
  • Link this topic to AS 5 for changes in policies and estimates, as questions often mix them.

Practice questions from AS 1 Disclosure of Accounting Policies

AS 1 Scope, Meaning and Definitions of Accounting Policies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 1 Scope, Meaning and Definitions of Accounting Policies: frequently asked questions

What are accounting policies as per AS 1?

They are the specific accounting principles and the methods of applying them that an enterprise adopts in preparing and presenting financial statements. Examples are the depreciation method and the inventory cost formula. AS 1 requires significant policies to be disclosed.

What is the difference between accounting policies and accounting estimates?

A policy is the method or basis chosen, such as straight line depreciation. An estimate is an uncertain amount judged using that method, such as the useful life of the asset. Estimates can be revised as better information arrives.

Is AS 1 about how to prepare financial statements?

No. It is about disclosing the significant accounting policies followed in preparing them. The rules for recognising and measuring individual items are in other Standards.

Do all accounting policies need to be disclosed?

Only significant policies need disclosure. Disclose those that help a reader understand the financial statements. They should be shown in one place along with the statements.