Accounting Convention are common methods applicable as a guideline when recording commercial transactions. Used when there is no clear guidance in the accounting standards that govern a particular situation. Therefore, Accounting Convention help fill gaps that are not yet addressed by accounting standards.
As the scope and details of accounting standards continue to grow, less space is available for accounting rules. However, industry-specific accounting requires a large number of accounting rules, as many of these areas have not yet been addressed by accounting standards.
Accounting convention are a necessary part of accounting professionals because they result in transactions that records in the same way by most of multiple organizations. This ensures that you can compare the financial results, financial position, and cash flows of many organizations.
Types of Accounting Conventions
Conservatism Accounting Convention
Accountants must follow the conservative principle of “playing safely” when preparing financial statements, taking into account all possible loss scenarios during transaction recording.
Two values were generated while logging an asset: market value and book value. These rules consider the worst-case scenarios, so lower values are generally considerable.
There are certain points which criticizes such principles. In some cases, it is seen that secret reserves have been created by indicating an excess of the allowance for doubtful accounts ,Bad debt, depreciation, etc.
Consistency Convention
Once a particular method of Accounting Convention gets selects by the business during the reporting process, than its follows consistently for the next few years. This principle helps investors and analysts read, understand and compare the company’s financial statements.
If a company wants to change the way, it should only be changed if there is a good reason to make a particular change. There are certain points that criticize this principle.
For example, considering certain items on a cost basis and other items on a market value invalidates the principle of accounting consistency.
Full Disclosure Accounting Convention
Important relevant information about a company’s financial position must be there in the financial statements even after the application of accounting rules.
Example: Contingent liabilities, proceedings against a business must be reported in the adjacent notes in the company’s financial statements.
Materiality Convention
This Accounting Convention includes the impact of an event or item and its relevance in the financial statements.
Accountants should report all such events and items that may influence the decisions of investors or analysts.
However, the information is worth investigating and should be more valuable than the cost of writing the statement. This means that due to its importance, an accountant can ignore certain principles if the item is not important.
Interested in learning about similar topics? Here are a few hand-picked blogs for you!
What is an Accounting Equation?
What is the Basic Accounting Concept?