Detailed notes on Accounting Principles and Policies for Cambridge IGCSE Accounting, covering key concepts, explanations, examples, and exam-focused revision points.
Accounting policies are the specific methods a business chooses when preparing its financial statements. Because different valid choices produce different profit figures, understanding policies is crucial for interpreting financial statements and explaining why two identical businesses can report different results.
At a glance
Accounting policies are the specific rules and methods a business applies when preparing financial statements.
Key areas where policy choices arise: depreciation method, inventory valuation, and provision for doubtful debts.
Different policies produce different profit figures even for businesses with identical trading activities.
Straight-line depreciation gives equal annual charges; reducing balance gives higher charges in early years.
FIFO values closing inventory at more recent prices; AVCO uses a weighted average — they give different gross profits in periods of changing prices.
The consistency concept requires the same policy to be applied year-on-year.
Policy changes must be disclosed in the notes to the accounts.
Policies affect multiple ratios: GPM, profit margin, ROCE, and asset values on the statement of financial position.
What you’ll learn
Mapped to the Cambridge IGCSE 0452 syllabus (2026-2028).
Define accounting policies and explain their purpose.
Explain how the choice of depreciation method (straight-line vs reducing balance) affects profit and asset values.
Explain how the choice of inventory valuation method (FIFO vs AVCO) affects gross profit in periods of changing prices.
Explain why two similar businesses may report different profits even though their trading activities are identical.
Apply the consistency concept to accounting policy decisions.
What are Accounting Policies?
▼
Accounting policies are the specific methods chosen to prepare financial statements.
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by a business in preparing and presenting its financial statements.
Think of accounting principles (concepts) as the broad rules that everyone must follow (e.g., accruals, prudence, consistency). Accounting policies are the specific choices a business makes within those rules. For example:
The accruals principle says depreciation must be charged. The depreciation policy says HOW — which method (straight-line or reducing balance) and at what rate.
The prudence principle says inventory should not be overstated. The inventory policy says which valuation method to use (FIFO or AVCO).
Why do policies matter?
Different, equally valid choices produce different profit figures and asset values. This means:
Two businesses with identical trading activities can report different profits.
The same business can report different profits in different years if it changes its policy.
Ratio comparisons between businesses using different policies are unreliable.
Disclosure requirement: Accounting policies must be stated in the notes to the financial statements so that users can understand how the figures have been calculated. This transparency allows users to make informed adjustments when comparing different businesses.
IAS 1 (International Accounting Standard 1) — referenced in some Cambridge contexts — requires that accounting policies are:
Consistently applied from period to period
Changed only when required by an accounting standard or when the change gives a fairer presentation
Disclosed, with the effect of any change explained
Policies are the specific methods chosen within the framework of principles
Key policy areas: depreciation, inventory valuation, provision for doubtful debts
Different policies → different profit and asset values
Policies must be disclosed and consistently applied
Depreciation Policy: Straight-Line vs Reducing Balance
▼
The depreciation method chosen significantly affects annual profit and net book value.
When a business acquires a non-current asset, it must choose a depreciation method. The two main methods in Cambridge 0452 are straight-line and reducing balance.
Straight-Line Depreciation
Annual charge=Useful Life (years)Cost−Residual Value
The annual depreciation charge is equal every year.
The asset's net book value (NBV) declines steadily in a straight line to residual value.
Reducing Balance Depreciation
Annual charge=Net Book Value at start of year×Rate%
The annual charge is higher in early years and decreases over time (because it is applied to a shrinking NBV).
The NBV never quite reaches zero.
Effect on profit and ROCE:
Consider an asset costing $100,000, no residual value, 10-year life:
Straight-line: $10,000 per year every year
Reducing balance at 25%: Year 1 = $25,000; Year 2 = $18,750; Year 3 = $14,063...
In Year 1, the reducing balance method gives a higher depreciation charge → lower profit → lower profit margin.
In Year 10, the straight-line charge is still $10,000 but reducing balance is only ~$750 → reducing balance shows higher profit in later years.
ROCE is also affected: different depreciation charges produce different net book values. A business using straight-line will have a higher net book value (larger capital employed) in early years than one using reducing balance, affecting the denominator of ROCE.
The key exam scenario: Two businesses buy identical machinery. Business A uses straight-line; Business B uses reducing balance. In year 1, Business B will report lower profit and lower ROCE — not because it is less efficient, but purely because of its depreciation policy choice.
Reducing balance front-loads the depreciation charge; straight-line spreads it evenly.
Straight-line: equal annual charge; simple and predictable
Reducing balance: higher charge in early years; lower in later years
Different methods → different annual profit → different profit margin and ROCE
Policy choice must be disclosed and applied consistently
FIFO and AVCO give different inventory values and different gross profits in changing price periods.
The choice between First In, First Out (FIFO) and Average Cost (AVCO) for inventory valuation affects:
The value of closing inventory on the statement of financial position
The cost of sales in the income statement
Gross profit and, therefore, the gross profit margin
FIFO (First In, First Out)
Assumes that the oldest inventory is sold first. Closing inventory is valued at the most recent purchase prices.
AVCO (Weighted Average Cost)
Every time new inventory is purchased, a new weighted average cost per unit is calculated. Closing inventory is valued at the current weighted average cost.
Effect in a period of RISING prices (inflation):
FIFO
AVCO
Cost of sales
Uses older (cheaper) prices
Uses average prices
Closing inventory
Valued at recent (higher) prices
Valued at average prices
Gross profit
Higher (lower cost of sales)
Lower than FIFO
Under FIFO, the cheaper older purchases are allocated to cost of sales, leaving the more expensive recent purchases in closing inventory. This gives a higher gross profit in rising price conditions.
Under AVCO, the cost of sales uses a blended average — neither the cheapest old prices nor the most expensive recent prices.
Example: A business buys 100 units at $10 each in January, then 100 units at $12 each in March. It sells 100 units during the period.
In falling price conditions, FIFO gives lower closing inventory and lower gross profit than AVCO (the roles reverse).
Exam scenario: 'Explain why two businesses with identical sales and purchases report different gross profit margins.' Answer: They use different inventory valuation methods. If prices have been rising, the FIFO business will have a lower cost of sales, higher gross profit, and higher gross profit margin than the AVCO business.
FIFO: oldest stock sold first; closing inventory at recent (higher) prices in rising markets
AVCO: closing inventory at weighted average cost
Rising prices: FIFO → higher gross profit than AVCO
Falling prices: FIFO → lower gross profit than AVCO
The percentage provision chosen affects net profit and the net value of trade receivables.
A business extending credit to customers knows that some debts may never be collected. The provision for doubtful debts (also called allowance for doubtful debts) is a prudent estimate of the value of trade receivables that may prove irrecoverable.
Policy choice: what percentage of trade receivables to provide for. Different businesses in the same industry may choose different rates (e.g., 2%, 3%, or 5%).
Effect on financial statements:
The provision is charged as an expense in the income statement → reduces net profit.
The net trade receivables on the statement of financial position = gross trade receivables − provision.
Example: Trade receivables = $80,000.
Business A: provision = 2% → provision = $1,600; net trade receivables = $78,400; expense = $1,600
Business B: provision = 5% → provision = $4,000; net trade receivables = $76,000; expense = $4,000
Business B shows $2,400 less profit and $2,400 less in net trade receivables than Business A — with identical trading activities. This is purely a policy difference.
Changes to the provision: if the provision % increases year-on-year, an increase in the provision is charged as an additional expense. If the provision decreases, the decrease is credited to the income statement (reduces expenses, increases profit). This creates volatility in reported profits even when trading is stable.
Provision % is a policy choice — different businesses choose different rates
Higher provision → lower profit → lower net trade receivables on SFP
Different policies affect GPM, profit margin, ROCE, and asset values — making comparisons unreliable.
A sophisticated understanding of accounting policies requires connecting policy choices to their specific impact on ratios.
Policy Choice
Ratios Affected
How
Straight-line vs Reducing balance (early years)
Profit margin, ROCE, net book value of assets
Reducing balance: higher depreciation → lower profit margin; higher depreciation → lower NBV → lower capital employed → higher ROCE in some years
FIFO vs AVCO (rising prices)
Gross profit margin, profit margin
FIFO: lower cost of sales → higher GPM and profit margin
Higher provision for doubtful debts
Profit margin, net trade receivables
Higher provision → lower net profit → lower profit margin; lower net trade receivables on SFP
The key exam question: 'Explain why two similar businesses may report different profit figures even though their trading activities are identical.'
Model answer framework:
State that different accounting policies can produce different profit figures
Give a specific example (e.g., different depreciation methods or different inventory valuation methods)
Explain the mechanism (e.g., 'if Business A uses straight-line depreciation at 10% and Business B uses reducing balance at 25%, Business B's depreciation charge will be higher in early years, resulting in lower profit')
Conclude that the difference reflects accounting policy, not trading performance
This is a 4–6 mark question that rewards depth and specificity.
Depreciation policy affects profit margin and ROCE
Inventory policy affects GPM and profit margin
Provision policy affects net profit and net trade receivables
Same trading → different profits if different policies applied
Ratios are not directly comparable between businesses using different policies
Quick recap
Accounting policies are the specific methods chosen to prepare financial statements (within the framework of accounting principles).
Key policy areas: depreciation method and rate, inventory valuation method, provision for doubtful debts percentage.
Straight-line depreciation: equal annual charge; reducing balance: higher charge in early years.
FIFO in rising prices gives higher gross profit than AVCO (lower cost of sales from older, cheaper purchases).
Higher provision for doubtful debts reduces both profit and the net value of trade receivables.
Different policies mean identical businesses can report different profits — this is a fundamental limitation of ratio comparisons.
The consistency concept requires the same policy to be applied each year; changes must be disclosed.
Memorise this
Verbatim phrases and definitions Cambridge mark schemes credit.
Accounting policy — specific method chosen for preparing financial statements (depreciation, inventory, provisions)
Straight-line: equal annual depreciation charge; Reducing balance: higher charge in early years
FIFO rising prices: lower cost of sales → higher gross profit than AVCO
AVCO: weighted average cost; cost of sales uses blended average price
Provision for doubtful debts: policy % choice affects profit and net trade receivables
Consistency: same policy each year; changes must be disclosed and explained
How it’s examined
Accounting policies questions appear in Section 3 of Cambridge 0452 papers, often as extended written response questions worth 4–8 marks.
Common formats:
'Explain why two similar businesses may report different net profit figures even though their trading activities are identical.' (4–6 marks)
'Business A uses FIFO and Business B uses AVCO. Explain how this difference would affect the gross profit margin of each business if prices have been rising.' (4 marks)
'Explain what is meant by an accounting policy and give two examples.' (4 marks)
'Explain why a change in depreciation method would make it difficult to compare this year's ROCE with last year's.' (3 marks)
Examiner tips:
For 'explain why profits differ' questions, always name the specific policy (not just 'accounting policy') and explain the mechanism.
In inventory valuation questions, always state the direction of price change and link it to which method gives the higher gross profit.
For depreciation questions, specify which years the difference is most pronounced (early years for reducing balance vs straight-line).
Sources: Cambridge IGCSE Accounting 0452 Syllabus 2026-2028; 0452 Examiner Reports 2022-2024; Cambridge IGCSE and O Level Accounting Coursebook, Catherine Coucom (Cambridge University Press). Last reviewed 2026-05-13.
Take this whole topic with you
Step-by-step worked examples — Accounting Policies
Step-by-step solutions to past-paper-style questions on accounting policies, written exactly the way a tutor would explain them at the board.
Question type:
1Name the Four Qualities of Useful Accounting Information (2 marks)
Financial statements are more useful when they possess certain qualities.
State the FOUR qualitative characteristics that make accounting information useful to its users.
Step-by-step solution
Step 1
Recall the four international qualitative characteristics. Cambridge 0452 follows the international framework, which identifies four qualities that make financial information useful: comparability, relevance, reliability, and understandability.
Step 2
State each with its core idea.Comparability — figures can be compared over time and between businesses. Relevance — the information is useful for making decisions. Reliability — the information is free from error and bias and can be depended upon. Understandability — the information is clear enough for users to understand.
Answer
The four qualities are comparability, relevance, reliability and understandability.
Examiner tip
Half a mark per correct quality, rounded to a whole mark per pair. The four exact terms are what score — vague paraphrases such as 'usefulness' or 'accuracy' on their own are not credited.
State which qualitative characteristic is mainly illustrated by each situation:
(a) The owner produces the year-end accounts within two weeks so the bank can decide quickly on a loan.
(b) The accounts use the same layout and headings as last year so this year's figures can be set against last year's.
(c) Every figure in the statements is supported by an invoice or receipt and contains no personal opinion.
(d) Technical jargon is avoided and clear headings are used so a non-accountant owner can follow the statements.
Step-by-step solution
Step 1
Recall what each quality means. Relevance → information is timely and useful for a decision. Comparability → figures can be set against earlier periods or other businesses. Reliability → free from error and bias, faithful to the facts. Understandability → clear and easy to follow.
Step 2
Match each scenario. (a) Information produced in time to influence a decision → Relevance. (b) Same layout so this year can be compared with last year → Comparability. (c) Supported by documents and free from opinion → Reliability. (d) No jargon, clear headings for a non-expert → Understandability.
One mark per correct match. The trap is (a): students often write 'reliability' because the bank is involved, but the key idea is that the information arrives in time to be useful for the decision — that is relevance (timeliness).
3Explain How Consistency Supports Comparability (4 marks)
Building confidenceWord problem• consistency, comparability, qualitative characteristics, accounting policies
▼
Question
In 2024 a business used the straight-line method of depreciation; in 2025 it switched to reducing balance; in 2026 it switched back to straight-line.
Explain how this affects the comparability of its financial statements, and state which accounting practice would have prevented the problem.
Step-by-step solution
Step 1
Identify the quality at risk. Comparability means a user can compare a business's results from one year to the next and judge the trend in performance. This requires that any change in the figures reflects a change in trading, not a change in method.
Step 2
Explain the effect of switching methods. Because the depreciation method changed each year, the depreciation charge — and therefore the reported profit — changes for reasons unconnected to trading. A user cannot tell whether profit moved because the business performed differently or simply because the policy was different. The year-on-year figures are therefore not comparable.
Step 3
State the remedy. Applying the consistency practice — using the same accounting policy each period — keeps the basis of measurement the same, so differences in the figures reflect real changes in performance. Consistency is therefore a prerequisite for comparability.
Answer
Switching methods each year destroys comparability, because profit changes due to the policy change rather than trading. Applying accounting policies consistently would have preserved comparability.
Examiner tip
Marks for: explaining what comparability requires, explaining why changing the method breaks it, and naming consistency as the remedy. The strongest answers state explicitly that consistency is a prerequisite for comparability rather than treating them as the same thing.
4Distinguish Relevance from Reliability (5 marks)
Building confidenceWord problem• relevance, reliability, qualitative characteristics, timeliness
▼
Question
A manager says: 'I would rather receive a rough estimate of this month's profit today than an exact figure in three months' time.'
(a) Identify the two qualitative characteristics that are in tension here.
(b) Explain what each characteristic means.
(c) Explain the trade-off the manager is describing.
Step-by-step solution
Step 1
(a) Identify the two qualities. The characteristics in tension are relevance and reliability.
Step 2
(b) Define each.Relevance means the information is useful for making a decision, which includes being provided in time (timeliness) to influence that decision. Reliability means the information is free from error and bias and faithfully represents what it claims to — it can be depended upon.
Step 3
(c) Explain the trade-off. A 'rough estimate today' is highly relevant (timely) but less reliable (it may contain estimation error). An 'exact figure in three months' is highly reliable but, arriving after the decision is needed, has lost much of its relevance. The manager is choosing timeliness over precision — accepting slightly lower reliability to keep the information relevant to a decision that must be made now.
Answer
(a) Relevance and reliability. (b) Relevance = useful and timely for decisions; reliability = free from error and bias, dependable. (c) A timely estimate is relevant but less reliable; a delayed exact figure is reliable but no longer relevant — the manager prefers relevance (timeliness) here.
Examiner tip
Cambridge rewards candidates who recognise that relevance includes timeliness, and that there is a genuine trade-off between the two qualities rather than one always being better. Define both terms precisely before discussing the trade-off.
5Identify Which Quality Is Compromised (6 marks)
StretchMulti-step problem• Adapted from Cambridge 0452 past paper style• qualitative characteristics, reliability, comparability, understandability, relevance
▼
Question
For each situation, identify the ONE qualitative characteristic that is mainly compromised, and briefly justify your choice:
(a) The owner deliberately values closing inventory above cost to make profit look higher for the bank.
(b) A business changes its inventory valuation method from FIFO to AVCO every year depending on which gives the higher profit.
(c) The financial statements are crammed with technical terms and abbreviations that the sole trader does not understand.
(d) The accounts for the year ended December are not completed until the following November, long after decisions had to be made.
Step-by-step solution
Step 1
(a) Deliberately overstating inventory to inflate profit. This introduces bias and error into the figures, so they no longer faithfully represent the business. The quality compromised is reliability (the information is biased and not free from error).
Step 2
(b) Changing the inventory method every year. Profit now changes because of the policy switch, not trading, so this year cannot be compared with last year. The quality compromised is comparability (caused by a failure to apply policies consistently).
Step 3
(c) Statements full of jargon the owner cannot follow. The user cannot interpret the information, so it is of little use to them. The quality compromised is understandability (the information is not clear to users).
Step 4
(d) Accounts completed eleven months late. Because the information arrives too late to influence the decisions, it has lost its usefulness — even if it is accurate. The quality compromised is relevance (it lacks timeliness).
One mark for each correct quality and one for each justification (4 + ~2). The hardest distinction is (b) versus (a): both involve manipulation, but (b)'s harm is to year-on-year comparison (comparability), whereas (a)'s harm is the biased figure itself (reliability).
6Link Consistent Policies to the Qualities of Useful Information (8 marks)
StretchMulti-step problem• Adapted from 0452 past paper• accounting policies, consistency, comparability, reliability, depreciation
▼
Question
Borg Traders is choosing how to apply its accounting policies. Last year it used straight-line depreciation; this year the bookkeeper suggests switching to reducing balance because Year 1 depreciation would be $16 000 instead of $8 000.
(a) Calculate the effect on this year's net profit of switching method, if profit before depreciation is $30 000.
(b) Explain which qualitative characteristic the switch would damage and why.
(c) Explain how applying policies consistently supports the usefulness of the financial statements.
Step-by-step solution
Step 1
(a) Net profit under each method. Straight-line: $30 000 − $8 000 = $22 000. Reducing balance: $30 000 − $16 000 = $14 000. Switching method alone would reduce reported net profit by $8 000, even though trading is unchanged.
Step 2
(b) Quality damaged: comparability. Because the depreciation method changed, this year's profit falls for a reason unconnected to trading performance. A user comparing this year ($14 000) with last year cannot tell whether the business performed worse or simply changed its policy. Comparability is therefore lost; reliability is also threatened if the change is made purely to manipulate the figures.
Step 3
(c) How consistency supports usefulness. Applying the same policies each year (the consistency practice) keeps the measurement basis stable, so changes in the figures reflect genuine changes in performance. This makes the statements comparable over time and more reliable (not manipulated), and clear, consistent presentation also aids understandability — together making the information genuinely useful for decisions.
Answer
(a) SL net profit $22 000 vs RB $14 000 — a $8 000 fall purely from the method switch. (b) The switch damages comparability (profit changes due to policy, not trading) and threatens reliability. (c) Consistent policies keep the basis stable, supporting comparability, reliability and understandability — making the statements useful.
Examiner tip
This question combines a short calculation with theory. The examiner expects students to quantify the $8 000 distortion, name comparability as the quality damaged, and explicitly link consistency back to the qualitative characteristics — not merely to assert that consistency is 'good'.
Model Answers — Accounting Policies
High-scoring sample answers for accounting policies on the Cambridge IGCSE 0452 paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.
Question 1
Paper 1 short-answer style2 marks
State what is meant by 'comparability' as a quality of useful accounting information. (2 marks)
Model answer
Comparability means that financial information can be compared — both over time (this year's figures against earlier years for the same business) and between different businesses. This lets users identify trends and judge relative performance.
Why this scores
One mark for the idea of comparison over time, one mark for comparison between businesses (or for identifying trends). A bare 'figures can be compared' usually scores one mark; specifying the two dimensions earns both.
Question 2
Paper 1 short-answer style2 marks
Explain why 'understandability' is important for users of financial statements. (2 marks)
Model answer
Understandability means the information is presented clearly — using plain terms, clear headings and a logical layout — so that users can interpret it. It matters because information that a user cannot understand is of no use for decision-making, no matter how accurate it is.
Why this scores
One mark for explaining the quality (clear/easy to understand), one for why it matters (otherwise the user cannot use it to make decisions). Reward the link to usefulness rather than just a definition.
Question 3
Paper 2 structured style4 marks
Explain what is meant by comparability and explain why applying accounting policies consistently is necessary to achieve it. (4 marks)
Model answer
Comparability is the quality that allows financial information to be compared over time and between businesses, so users can identify trends and judge performance. For a comparison over time to be meaningful, the figures in each period must be prepared on the same basis. If a business changes its accounting policy — for example switching from straight-line to reducing-balance depreciation — the reported profit changes for a reason unconnected to trading, so this year cannot be fairly compared with last year. By applying its policies consistently (the same method each period), the business keeps the measurement basis stable, so any change in the figures reflects a real change in performance. Consistency is therefore a prerequisite for comparability.
Why this scores
Marks: one for defining comparability, one for the point that comparison requires the same basis, one for explaining how a policy change distorts the comparison, and one for naming consistency as the safeguard. Top answers state that consistency underpins (is a prerequisite for) comparability.
Question 4
Paper 2 structured style5 marks
Distinguish between 'relevance' and 'reliability' as qualities of useful accounting information, using an example to illustrate the difference. (5 marks)
Model answer
Relevance means the information is useful for making a decision and is provided in time to influence it (timeliness). Reliability means the information is free from error and bias and faithfully represents the transactions it records — it can be depended upon. The two can pull in opposite directions. For example, a manager deciding whether to order more stock today benefits more from a rough estimate of profit produced now (highly relevant because it is timely) than from a precise figure produced three months later (highly reliable, but arriving too late to be relevant). So relevance is about usefulness and timeliness for a decision, while reliability is about accuracy and freedom from bias; good financial statements try to achieve both, but sometimes a sensible trade-off between them is required.
Why this scores
Marks for defining relevance (useful/timely), defining reliability (free from error and bias/dependable), a clear contrast, a worked example, and recognition of the trade-off. The example is what lifts the answer above a textbook definition.
Question 5
Paper 2 analysis/interpretation style8 marks
The four qualitative characteristics of accounting information are comparability, relevance, reliability and understandability. Explain how each of these characteristics helps to make a set of financial statements useful to its users. (8 marks)
Model answer
Financial statements are only worth preparing if they are useful to the people who rely on them — owners, lenders, suppliers and managers — and the four qualitative characteristics each contribute to that usefulness.
Comparability allows users to compare the figures over time and between businesses. By setting this year against last year, or one business against another, users can spot trends and judge relative performance — for example, whether profit is rising or falling. Without it, the figures cannot be interpreted in context.
Relevance ensures the information is useful for the decision in hand and provided in time to affect it. Information that is out of date — such as accounts finalised long after a loan decision had to be made — has lost its relevance, even if it is accurate. Relevant information directly supports the user's decision.
Reliability ensures the information is free from error and bias and faithfully represents what actually happened. Users can only depend on the statements to make sound decisions if the figures are not manipulated or guessed — for instance, inventory should be valued objectively, not inflated to flatter profit.
Understandability ensures the information is clear enough for users to interpret, using plain language and a logical layout. However accurate or relevant a figure is, it is useless if the reader cannot make sense of it.
Together these qualities mean users receive information they can trust (reliability), interpret (understandability), apply to their decision in time (relevance), and set in context (comparability) — which is exactly what makes a set of financial statements genuinely useful.
Why this scores
Two marks per characteristic — one for the meaning and one for how it contributes to usefulness — up to the 8-mark ceiling. The concluding synthesis (tying all four together) demonstrates full understanding and helps secure the top band. Each quality must be defined correctly; a wrong definition forfeits both marks for that characteristic.
Question 6
Paper 2 evaluation (AO3) style6 marks
A business wants to change its accounting policies so that its profit appears higher to attract a buyer. Advise the business whether it should change its accounting policies for this reason. Justify your answer by providing arguments for and against. (6 marks)
Model answer
Arguments for changing the policies
In the short term it might make profit look higher — for example switching to straight-line depreciation or to a method that raises the closing inventory value — which could make the business more attractive to a potential buyer and help it sell at a better price.
Accounting policies can legitimately be changed when the circumstances of the business genuinely change (for example a different pattern of asset use), so changing a policy is not wrong in itself.
Arguments against changing the policies
It breaches comparability and consistency: profit would change because of the policy switch, not because of trading, so this year could no longer be compared fairly with previous years.
It makes the financial statements misleading and unreliable, because the figures are being adjusted with bias rather than faithfully representing the business's performance.
The change is being made for the wrong reason — to flatter profit and deceive a buyer, not because circumstances have genuinely changed.
If the buyer (or their accountant) discovers it, users lose trust in the statements and in the owner.
The accounts would not give a true and fair view, and any sale based on them could later be challenged.
Recommendation
The business should not change its accounting policies simply to make profit appear higher. It should apply its policies consistently and only change them when there is a genuine reason, disclosing the change and its financial effect. This keeps the statements comparable, reliable and trustworthy, which protects both the buyer and the long-term credibility of the business.
Why this scores
This is an AO3 evaluation question. The mark scheme awards a maximum of 3 marks for valid 'for' points and a maximum of 3 marks for valid 'against' points, but the discussion itself is capped at 5 marks; the final mark (6th) is reserved for a clear recommendation that is supported by the arguments made. Strong answers explicitly reference comparability, consistency and reliability, and conclude that policies should not be changed merely to flatter profit.
Key Definitions and Keywords — Accounting Policies
Definitions to memorise and the exact keywords mark schemes credit for accounting policies answers — sharpened from recent examiner reports for the 2026 0452 sitting.
Accounting Policy
Examiner keyword▼
The specific principles, methods, and procedures that a business adopts to prepare and present its financial statements. Examples include the choice of depreciation method (SL vs RB), inventory valuation method (FIFO vs AVCO), and the basis for recognising revenue.
Consistency (applied to policies)
Examiner keyword▼
Once an accounting policy is chosen, it must be applied consistently from one period to the next. Changes to accounting policies are permitted only in exceptional circumstances and must be disclosed, with the financial effect of the change stated.
Comparability
Examiner keyword▼
A qualitative characteristic of financial information requiring that figures can be compared across time periods (within the same business) and across businesses. Consistency of accounting policies is a prerequisite for comparability.
Depreciation Policy
Examiner keyword▼
A business's chosen method (straight-line or reducing-balance) and rate for allocating the cost of non-current assets over their useful lives. Different policies produce different carrying amounts and profit figures — making consistent application essential.
Common Mistakes and Misconceptions — Accounting Policies
The traps other students keep falling into on accounting policies questions — taken from recent Cambridge IGCSE 0452 examiner reports and mark schemes — and how to avoid them.
✕Confusing accounting policies (methods chosen by the business) with accounting concepts (fundamental principles all businesses follow).
Cambridge 0452 Examiner Reports 2022-2024
▼
Why it happens
Both are 'rules', so students blur the distinction.
How to avoid it
Accounting CONCEPTS are fundamental requirements (accruals, prudence, going concern, consistency). Accounting POLICIES are specific choices within those frameworks — e.g. choosing SL vs RB depreciation, or FIFO vs AVCO. A business must follow the accruals concept but can choose which depreciation method to use.
✕Stating that businesses can change accounting policies at any time to improve reported profit.
Cambridge 0452 Examiner Reports 2022-2024
▼
Why it happens
Students are unaware of the consistency requirement.
How to avoid it
Changing accounting policies frequently to manipulate reported profit undermines the consistency concept and the reliability of financial statements. Changes are only permitted for good reasons and must be disclosed with the financial effect quantified.
✕Assuming that a higher reported profit is always caused by 'better' accounting policies.
Cambridge 0452 Examiner Reports 2022-2024
▼
Why it happens
Students do not appreciate that policies can be used to inflate or deflate reported figures.
How to avoid it
A higher net profit could simply result from choosing SL (lower depreciation) instead of RB, or FIFO (higher closing inventory) instead of AVCO. The underlying trading performance may be identical. This is why understanding accounting policies is essential for intelligent interpretation of financial statements.