Accounting Convention create a methodology that allows to compare financial results in the same industry and from year to year in a reliable way. Thanks to this accounting conversions show how annual, quarterly and monthly statements are created. Convention is not created on the basis of any law but it results from accounting principles.
This is a generally accepted convocation based on regulations that is intended to help accountants overcome problems arising during the preparation of financial statements. Typically, convention is used in situations where there is no legal guidance in accounting standards that relate to a particular situation (Weil, R.L., 2014, s.24).
Types of Accounting Convention
Accounting Convention it act like guide to select and apply procedure. The 4 most important convenvtions are shown below (Rajasekaran V., 2011, s.23-29):
- Convention of Disclosure - Accounting reports must be prepared in a fair manner and any relevant information should be disclosed. When making accounting entries, you must exercise due care to present all relevant information. the emphasis in this convention is to put the relevant information and not those assets. In order to present the company's image as accurately as possible, the balance sheet and profit and loss account forms are attached to the Accounting Act so that no relevant information can be omitted.
- Convention of Consistency - The practices and accounting rules must be constantly observed and applied in the same way. This allows you to draw conclusions about the functioning of the company for many years, provided that the practices and methods of accounting have remained unchanged in individual periods. Comparisons are only possible if a consistent accounting policy is followed. It allows the accuracy and comparability of accounting information. In the event of any change, its effect should be justified in the financial statements.
- Convention of Conservatism - refers to the policy of choosing a procedure that relates to understatements in terms of over-or under-inflating income or resources. For example, closing stock is valued at cost or market price whichever is lower. This is a convention of caution or playing safe and is adhered to while preparing financial statements.
- Convention of Materiality - The economic significance of the item affects how it will be posted. Some non-essential items are omitted in the financial statements or attached to others. an object considered important for one company may be completely irrelevant to the other.
Purpose of Accounting Convention
Convention, which is widely used when saving business transactions. If there is no final ecism within accounting standards, accounting convention is applied that regulates a particular situation. Accounting conventions are used to supplement ambiguities that have not yet been included in accounting standards.
The use of accounting conventions is necessary in the work of every accountant. Transactions recorded in exactly the same way by many organizations allow for a reliable comparison of the financial results of the vast majority of organizations.
Definitely more accounting conventions can be found in industry accounts. This is due to the fact that many of them have not yet been defined in the accounting standards. With the increase in the scope and detail of accounting standards, there are fewer areas where accounting conventions can still be used (May, G.O. 2007, s.74-79).
- May, G.O., (2007). Financial Accouting. Smith Press, s.74-79.
- Rajasekaran V., Lalitha, R., (2011). Financial Accounting. New Delhi, s. 23-29.
- Weil R.L., Schipper K., Francis J. (2014). Financial Accounting: An Introduction to Concepts, Methods and Uses. Mason, USA. s. 24.
Author: Beata Kocyłowska