Definition
The financial accounting term valuations and accounting policies refers to information that is supplemental to the company's financial statements. These explanations provide insights into the accounting policies in-place, as well as the methods used to value line items appearing in these reports.
Explanation
Valuations and accounting policies are one of several types of information that is supplementary to the items appearing on a company's balance sheet or income statement. Examples of these disclosures include:
- Accounting Policies: specific policies and procedures used in the preparation of the company's financial statements.
- Valuations: methods used when determining the current worth of a balance sheet asset, or the allocation of costs appearing on the income statement.
While accounting principles provide companies with guidelines and rules to use in the preparation of financial statements, the policies and methods used by accountants can be conservative or liberal. Providing this information allows the reader of a financial statement to understand the methods chosen, and draw conclusions as to the company's quality of earnings.
For example, Generally Accepted Accounting Principles provide several methods to account for depreciation and inventory estimates. The policies and valuation disclosures will indicate if the company has chosen straight line or declining balance depreciation, or the LIFO versus FIFO approach to valuing inventory.
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