Accounting Policies

What is Meant by Accounting Policies?

Accounting policies are essentially the standards or rules creators follow when recording financial information. For example, a photographer might need a specific accounting policy to record income from commissioned shoots versus royalties from stock photo sales. These guidelines help make financial records accurate, making it easier to track earnings over time, prepare for tax season, and share transparent reports with potential investors or collaborators. An accounting policy can include rules on recognizing revenue, valuing assets, and disclosing information—providing creators with a roadmap for every financial decision.

IFRS vs. GAAP

When it comes to reporting, two main frameworks exist: International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). In the U.S., GAAP is widely used, while IFRS is often followed internationally. For creators working across borders—say, a video editor with clients in Europe and the U.S.—understanding both standards can clarify which approach aligns with local or client expectations. By adopting the right accounting policies, creators can accurately manage finances, ensuring compliance and consistency with the relevant standard.

What Are Some Examples of Accounting Policies?

There are several essential accounting policies and procedures that provide the basis for transparent and reliable financial reporting:

1. Revenue Recognition Policy – Revenue recognition dictates when revenue is officially recorded. For example, a podcaster might record ad revenue when a campaign runs rather than when payment is received. Clear revenue recognition policies help creators see their true earnings and keep track of pending payments.
2. Cost Principle – The cost principle ensures that assets are recorded based on their original purchase cost. For creators, this might mean recording the purchase price of items like cameras or musical instruments and maintaining those figures in the financial records even if they gain or lose value over time.
3. Matching Principle – This principle matches expenses to the revenue they help generate. For instance, a filmmaker should match the costs of renting a set location to the project revenue that will cover it. The matching principle helps creators understand project profitability and measure the financial impact of each expense.
4. Full Disclosure Principle – This policy requires that any information that might impact financial decisions is disclosed. Whether it's a new source of income or a liability related to a project, creators can maintain transparency, offering full insight into their finances for investors, tax authorities, or collaborators.
5. Objectivity Principle – Emphasizing accuracy, this principle states that records should rely on concrete, objective evidence, like receipts or contracts. This policy is particularly helpful for creators working across varied projects, ensuring all records are fact-based and auditable.

Using a consistent set of accounting policies helps creators meet these principles while providing a structured way to manage revenue and expenses accurately.

What Factors Influence Which Accounting Policies Are Chosen?

The selection of accounting policies for a creator’s business may depend on factors like industry, location, and business size:

1. Industry – Different industries have unique financial needs. For instance, a creator in visual arts might prioritize policies addressing asset valuation for high-value items like art supplies or equipment.
2. Location – Local regulations may influence accounting policy choices. In some countries, specific policies are preferred or even mandated, especially around tax reporting and income recognition. Adapting policies to align with these standards can simplify compliance.
3. Size of Business – Larger creative businesses, like production studios, may have more complex financial needs and therefore adopt a broader range of accounting policies. Smaller solo creators, however, might choose a simpler set of policies for efficiency.

Conservative vs. Aggressive Policies

When defining accounting policies, creators might take a conservative or aggressive approach. Conservative policies tend to minimize reported income or asset values, a useful tactic for creators focusing on tax management. An aggressive approach may report higher earnings, potentially beneficial for attracting investors but often requiring stricter documentation. Finding the right balance can help creators align financial strategies with their unique goals.

Do Small Businesses Need Accounting Policies?

Even for solo creators or small creative businesses, accounting policies serve as a vital tool for maintaining consistent financial practices. Clear policies simplify financial management, reduce the chances of reporting errors, and offer a reference for tax preparation. An accounting policies and procedures manual can further organize finances, giving creators a straightforward resource to refer to when handling complex transactions or questions.

The Significance of Accounting Policies

Establishing accounting policies is not just about maintaining organized records; it’s about creating a trustworthy financial framework that benefits everyone involved in the creative process. For creators, the benefits include:

1. Government oversight – Policies align financial records with local regulations, making compliance easier for tax purposes.
2. Structured framework – Accounting policies provide an organized approach to managing finances, ideal for creators with varying income sources and project costs.
3. Investor confidence – Well-documented and consistent accounting practices give investors a clearer view of financial health, an advantage for creators seeking funding or partnerships.

By following thoughtful accounting policies, creators can confidently manage their finances, maintain transparency, and focus on the work they love.