Accounting is a world in itself because it has many principles, methods, rules, etc. which are used to complete the accounting work in a systematic manner and one of them is the accounting conventions. Accounting conventions are not a rule because it is a custom or practice which is going on since centuries and its use is not compulsory, but it can be used to do the accounting work in a systematic manner.
Accounting conventions include full disclosure, consistency, materiality, conservation or prudence, etc. and all these conventions help in performing the accounting functions well.
Table of Contents
Accounting Conventions
Following are the accounting conventions:
1. Full Disclosure Convention:
Full disclosure convention says that no facts should be hidden during accounting because doing so can reduce the trust of people (consumers, customers, investors, creditors, etc.) in the organization but full disclosure does not mean disclosing the secret information of the organization. In simple words, such facts should not be hidden which should be known to the people like loss, fraud, etc.
2. Consistency Convention:
According to this accounting convention, there should be uniformity in the accounting process and methods used in the organization as it makes it easier to understand various accounting reports. In simple words, the method or process used this year should be used in the next year as well. For example, if the written down value method is used for depreciation in the current year, the same method should be used in the next year as well.
3. Materiality Convention:
This accounting convention states that only those elements which are essential should be disclosed separately in the books and those elements which are not essential should be recorded by combining them in related books because doing so reduces the burden of accounting work and thus improves the efficiency of accounting work. Note: Essential elements may vary for each organization.
4. Conservatism or Prudence Convention:
This accounting convention says, “Do not anticipate profits, but provide for all possible losses”. In simple words, do not record future profits now, but record future losses now. For example, do not record future appreciation to assets, increases in stock price, etc. now, but record future decreases/depreciation to assets, decreases in stock price, etc. now. Example: Valuing closing stock at cost or market value, whichever is lower, making provision for doubtful debts, giving discounts on debtors, etc.
Read Also:
- Accounting Concepts
- What is Accounting? Meaning, Features, and More.
- Process of Accounting
- Advantages and Disadvantages of Accounting
- What is the Accrual Basis of Accounting? Meaning, Features, and more.
- What is the Cash Basis of Accounting? Meaning, Features, and More.
- What is Hybrid Basis of Accounting? Meaning, Features and More.
QNA/FAQ
Q1. What are accounting conventions?
Ans: Accounting conventions are the customs, practices, and practicalities that have been used in accounting for centuries to achieve better accounting results.
Q2. What does the consistency convention say?
Ans: The consistency convention states that an accounting procedure or method should not be changed frequently without a solid reason.
Q3. “Do not anticipate profit, but make provision for all possible losses”, is this said in which convention?
Ans: Conservatism or Prudence Convention
Q4. Are accounting conventions a custom?
Ans: Yes, accounting conventions are a custom.
Q5. Write classification of accounting conventions.
Ans: Following are the classification of accounting conventions:
1. Full Disclosure Convention
2. Consistency Convention
3. Materiality Convention
4. Conservatism or Prudence Convention
