If your bookkeeper quit tomorrow, would anyone on your team know exactly how to record a sale or which expenses to capitalize?
According to U.S. Bank, 82% of small businesses fail due to cash flow problems, and inconsistent accounting policies are often the silent culprit.
This guide breaks down what accounting policies actually are, why they matter for your specific business, and exactly how to create them, even if you’ve never written a single policy before.
We’ll walk through real examples, common mistakes, and a step-by-step process so you can build a company accounting policies manual that keeps your books clean and your audits stress-free.
Key Takeaways
- What accounting policies are, and why small businesses can’t afford to skip them
- The 7 essential policies every company needs to document
- How to create an accounting policy manual in 7 clear steps
- Real policy language you can copy and customize
- Common mistakes that trigger audits, and how to avoid them
What Are Accounting Policies and Why Do Small Businesses Need Them?
Accounting policies are the specific rules and methods your company uses to record transactions, value assets, and prepare financial statements. Small businesses need them to ensure consistency, pass audits, and make accurate financial decisions.
Think of accounting policies as your business’s financial rulebook. They answer questions like: “When do we count a sale as revenue?” or “How do we calculate depreciation on equipment?”
Without these rules written down, anyone who touches your books might do things differently, and that’s a recipe for chaos.
Here’s what policies actually cover:
- What method do you use (FIFO, LIFO, straight-line depreciation)
- When you recognize income and expenses
- How you value inventory, assets, and receivables
Now, don’t confuse policies with procedures. Policies define the “what.” Procedures define the “how.”
For example, your policy might state that you use FIFO inventory valuation. Your procedure explains the steps your team takes to count and record that inventory every month.
Why does this matter for your small business?
There are three reasons:
- Consistency: Everyone records transactions the same way, period after period
- Audit readiness: The IRS and external auditors want to see documented, consistently applied policies
- Staff transitions: When your bookkeeper leaves, the next person knows exactly what to do
What's the Difference Between Accounting Policies, Procedures, and Standards?
Accounting standards (GAAP/IFRS) are rules set by regulatory bodies. Accounting policies are the specific methods your company chooses within those rules. Accounting procedures are the step-by-step processes your team follows to execute those policies.
Here’s an analogy that makes this click: Standards are traffic laws. Policies are your driving habits within those laws. Procedures are the steps you take to park the car.
| Element | Accounting Standards | Accounting Policies | Accounting Procedures |
|---|---|---|---|
| What it is | Rules from FASB/IASB | The methods your company chooses | Steps to execute policies |
| Who creates it | Regulatory bodies | Company management | Finance team |
| Example | GAAP, IFRS | "We use FIFO for inventory." | "Inventory is counted every Monday at 9 AM" |
| Flexibility | Mandatory | Some choice within standards | Fully customizable |
In the US, GAAP (Generally Accepted Accounting Principles) sets the standards. Internationally, it’s IFRS (International Financial Reporting Standards). Your policies must comply with whichever framework applies to you.
Why does this distinction matter?
During an audit, you’ll need to demonstrate that your policies align with GAAP or IFRS and that your procedures consistently implement those policies. The IRS doesn’t care that you “usually” do things a certain way. They want documentation.
According to the FASB, companies must disclose their significant accounting policies in financial statement notes. This isn’t optional; it’s a requirement for compliance.
What Are the Essential Accounting Policies Every Small Business Needs?
Every small business needs policies for: revenue recognition, expense reimbursement, fixed asset capitalization, accounts payable procedures, accounts receivable policy, cash handling procedures, and inventory valuation.
Here’s each one explained:
- Revenue Recognition Policy: Defines when and how you record income. Do you recognize revenue at delivery, at payment, or over time for services? This must align with ASC 606 under GAAP.
- Expense Reimbursement Policy: Sets rules for employee expense claims, including what’s reimbursable, required documentation, the approval process, and the payment timeline.
- Fixed Asset Capitalization Policy: Establishes the dollar threshold for capitalizing vs. expensing purchases. Many small businesses use $2,500 as the cutoff. Assets above this are depreciated; those below are expensed immediately.
- Accounts Payable Procedures: Documents how bills are approved, recorded, and paid. Includes the three-way match process (purchase order, receipt, invoice) and payment authorization levels.
- Accounts Receivable Policy: Covers credit terms you extend to customers, invoicing timing, and your collections process for overdue accounts. Learn more in our accounts receivable journal entry guide.
- Cash Handling Procedures: Specifies who handles cash, how deposits are made, reconciliation frequency, and segregation of duties to prevent fraud.
- Inventory Valuation Policy: States whether you use FIFO (first-in, first-out), LIFO (last-in, first-out), or the weighted average method. This directly impacts your cost of goods sold and tax liability.
Pro Tip: The IRS requires consistent application of accounting policies. Changing methods mid-year without proper documentation can trigger audit flags.
How Do You Create an Accounting Policy Manual? (Step-by-Step)
To create an accounting policy manual, start by identifying all financial processes. Document current practices and align them with GAAP or IFRS requirements. Write clear policy statements and include step-by-step procedures. Obtain leadership approval and train your team on the new policies. This will ensure the effective implementation of your accounting practices.
Step 1: Audit Your Current Financial Processes
List every financial activity your business performs: invoicing, bill payments, payroll, expense reports, inventory tracking, and bank reconciliations. You can’t write policies for processes you haven’t identified.
Step 2: Document What You’re Already Doing
Interview your bookkeeper or accountant. Capture existing practices, even informal ones. You might discover you already have policies; they’re just not written down.
Step 3: Align with Accounting Standards
Ensure your policies comply with GAAP (U.S.) or IFRS (international). If you’re unsure whether a method is compliant, consult a CPA. The IRS provides guidelines for acceptable accounting methods.
Step 4: Write Clear Policy Statements
Use this format:
“It is the policy of [Company] to [action] using [method] in accordance with [standard].” Be specific. Vague policies are as useless as no policies at all.
Step 5: Add Detailed Procedures
For each policy, document who does what, when, and how. Include approval workflows, software tools used, and exception handling. This is where your controller services or CFO involvement becomes valuable.
Step 6: Review and Approve
Have leadership and your external accountant review the manual before finalizing. Fresh eyes catch gaps you missed.
Step 7: Train and Implement
Share the manual with all relevant team members. Schedule annual reviews to keep policies up to date.
Accounting Policy Examples: Real Language You Can Use
An accounting policy statement typically includes: the policy name, purpose, applicable standard, method chosen, and responsible parties. Below are examples you can customize.
Example 1: Revenue Recognition Policy
It is the policy of [Company Name] to recognize revenue when control of goods transfers to the customer, in accordance with ASC 606.
For product sales, revenue is recognized upon delivery. For service contracts, revenue is recognized as services are performed on a pro-rata basis over the contract term.”
Example 2: Fixed Asset Capitalization Policy
Assets with a useful life greater than one year and a cost exceeding $2,500 shall be capitalized and depreciated using the straight-line method over the asset’s estimated useful life.
Assets below this threshold shall be expensed in the period of purchase. The Controller is responsible for maintaining the fixed asset register.
Example 3: Expense Reimbursement Policy
Employees must submit expense reports within 30 days of incurring business expenses. Receipts are required for all expenses exceeding $25. Reimbursement is processed within 14 business days of manager approval. Mileage is reimbursed at the current IRS standard rate.”
Each example has a noticeable pattern, which states:
- What action is taken
- What method or standard applies
- Who is responsible
- Any thresholds or timelines
Important Note: Customize these templates to fit your industry, company size, and legal requirements. For example, inventory policies will differ between a retail business and a SaaS company.
If you use QuickBooks bookkeeping services, your software can help enforce these policies through automated rules and approval workflows.
Common Accounting Policy Mistakes Small Businesses Make
The biggest mistakes are: having no written policies, inconsistent application, mixing personal and business transactions, failing to update policies when standards change, and failing to train staff on procedures.
Mistake 1: No Written Documentation
“We’ve always done it this way” isn’t a policy. Verbal agreements disappear when employees leave. Write it down.
Mistake 2: Inconsistent Application
Your sales team uses one revenue recognition method while your accountant uses another. Auditors see this immediately, and it raises red flags.
Mistake 3: Mixing Personal and Business Finances
Using the same account for business expenses and personal purchases destroys your audit trail. Separate everything.
Mistake 4: Ignoring Updates to GAAP/IFRS
Standards change. ASC 606 for revenue recognition was a major shift that many small businesses still haven’t fully adopted. Outdated policies mean non-compliance.
Mistake 5: No Training or Communication
Policies exist in a binder nobody reads. If your staff doesn’t know the rules, they can’t follow them.
Mistake 6: One-Size-Fits-All Policies
A manufacturing company and a consulting firm have different accounting needs. Generic templates without customization leave gaps.
Mistake 7: Never Reviewing or Updating
Your business evolves. New products, new states, new software. Policies that worked three years ago may not fit today.
Conclusion
Accounting policies are essential for maintaining the integrity of your financial processes. They provide a framework that ensures consistency and protects you during audits. By establishing clear rules, you avoid relying on guesswork and memory when making financial decisions. We discussed the key differences between accounting policies, procedures, and standards, as well as the seven crucial policies every small business should implement.
I walked you through a seven-step process for creating your own accounting policy manual, provided real policy language you can adapt, and highlighted common mistakes that can trigger audits.
Remember, successful businesses aren’t just the most profitable ones; they have robust financial systems that function seamlessly, even amid changes or unexpected challenges. So, document your policies, train your team, and review them annually. This investment will result in cleaner audits, smoother operations, and more informed financial decisions.
Schedule your free consultation with our accounting team today!
We’ll review your current policies and help you build a manual that protects your business, no pressure, no sales pitch.
FAQ
Question 1: What is an accounting policy manual?
An accounting policy manual is a documented collection of all the accounting policies and procedures your company follows. It serves as a reference guide for employees, auditors, and management to ensure consistent financial reporting. Most manuals include policies for revenue recognition, expense handling, asset capitalization, and cash management. Think of it as your business’s financial operating manual.
Question 2: What’s the difference between accounting policies and accounting procedures?
Accounting policies define what method you use (e.g., FIFO for inventory). Accounting procedures define how you implement that policy (e.g., the specific steps for monthly inventory counting and recording). Policies are the rules; procedures are the actions. You need both documented.
Question 3: Can a small business change its accounting policies?
Yes, but changes must be justified and properly documented. Under GAAP, voluntary policy changes require retrospective application—meaning you adjust prior period financial statements as if the new policy had always been used. This isn’t a simple process. Consult a CPA before making changes, and document your rationale thoroughly.
Question 4: What accounting policies are required by GAAP?
GAAP doesn’t mandate specific policies but requires consistency and disclosure. You must disclose your policies for: revenue recognition, inventory valuation, depreciation methods, and any significant accounting estimates. The key requirement is that whatever policies you choose, they comply with GAAP standards and are applied consistently. See FASB’s guidance for detailed requirements.
Question 5: How do I know if my accounting policies are compliant?
To ensure compliance with your policies, they must align with GAAP or IFRS standards, be applied consistently year over year, be properly disclosed in your financial statements, and be reviewed by a qualified CPA. Regular annual policy reviews and external audits are essential for maintaining ongoing compliance. If you have any doubts, consult your accountant.
