What it means
Standards set the boundaries and practice describes what happens inside them. Where a standard allows a choice, such as between straight line and reducing balance depreciation, the option a company selects becomes its accounting practice and is documented in its accounting policies.
Practice covers routine as well as policy. How often bank accounts are reconciled, who approves a journal, when accruals are reviewed and how the month is closed are all part of the practice of accounting in a business, and they determine whether the reported numbers can be trusted.
The choices are rarely neutral in their effect on reported results. Reducing balance depreciation front-loads the charge, first in first out stock valuation reports higher profit than weighted average when prices are rising, and a low capitalisation threshold pushes more cost into the balance sheet.
None of these changes the cash the business generates. Because the effect on profit is real, practice must be consistent from year to year and disclosed clearly.
A change is permitted when it gives more reliable or relevant information, but it usually requires restating comparative figures so readers can still compare periods on the same basis. The second meaning of the term is worth knowing because it appears constantly in conversation.
An accounting practice in that sense is the firm itself, and people talk about buying a practice, the size of a practice's client book or moving from practice into an in-house finance role.
In practice
Real-world examples.
Example
A civil engineering firm sets its capitalisation threshold at $2,000, so a $1,500 laptop is expensed while a $2,400 survey instrument is capitalised over four years. A competitor uses a $500 threshold, reports more assets and slightly higher profit, and follows exactly the same standards.
Example
An accounting practice with 300 small business clients moves everyone onto a single cloud ledger and a standard month end checklist. Preparation time per client falls by around 20%, and the firm reprices its compliance work to bundle in quarterly management accounts.
Example
A food producer switches from weighted average to first in first out stock valuation as ingredient prices rise. Reported gross profit increases by $95,000, so the change is disclosed in the notes and the prior year comparative is restated on the new basis.
Formula
Calculation
Depreciation policy is the clearest example of practice affecting reported profit.
Straight line depreciation = (cost - residual value) / useful life
Reducing balance depreciation = carrying value at the start of the year x rate
A packaging business buys a machine for $240,000, expects a residual value of $40,000 and a useful life of five years.
Straight line charge = ($240,000 - $40,000) / 5 = $200,000 / 5 = $40,000 a year, every year.
Under a reducing balance practice at 30%:
Year 1 = $240,000 x 0.30 = $72,000, leaving a carrying value of $240,000 - $72,000 = $168,000.
Year 2 = $168,000 x 0.30 = $50,400, leaving a carrying value of $168,000 - $50,400 = $117,600.
Over the first two years, straight line charges 2 x $40,000 = $80,000 while reducing balance charges $72,000 + $50,400 = $122,400. The difference of $122,400 - $80,000 = $42,400 comes straight off reported profit in the early years under the second practice, even though the machine, the cash paid and the work it does are identical.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Selby Packaging, an invented carton manufacturer, ran two production sites that had grown up under different finance managers. The northern site depreciated machinery on a straight line basis over five years, while the southern site used reducing balance at 30%.
On an identical $240,000 machine this produced a first year charge of $40,000 in the north and $72,000 in the south, and $80,000 against $122,400 across two years. Site profitability reports were being used to decide where to invest next, and the southern site looked persistently weaker for reasons that had nothing to do with how it was run.
Once the fictional company standardised its practice on straight line depreciation and restated both sites on the same basis, the southern site turned out to have the better margin per tonne. The board redirected a planned $1,200,000 investment accordingly, having nearly made a significant capital decision on the strength of an inconsistent accounting practice.
Watch out
Common mistakes.
- Assuming that following the standards means there is only one correct set of numbers, when permitted choices produce materially different results.
- Letting different sites, divisions or acquired businesses keep incompatible practices, which makes internal comparison meaningless.
- Changing a practice to improve reported profit without a genuine reason, disclosure or restated comparatives.
Questions
People also ask.
What is the difference between accounting practice and accounting policy?
A policy is the specific documented choice, such as straight line depreciation over five years, while practice is the broader term covering those policies and the day to day routines around them.
Can a business change its accounting practice?
Yes, when the new approach gives more reliable or more relevant information, but the change and its effect must be disclosed and comparatives usually restated.
Why do people also call an accounting firm a practice?
It is long-standing professional usage, in the same way as a legal or medical practice, and context makes clear which meaning is intended.
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