Part -2

Accounting Conventions
 Introduction to accounting

ACCOUNTIONG CONVENTIONS

DEFINITION:
“Accounting conventions are the set o guide lines that companies used to record financial
transactions.”

OR

“Accounting convention is a set of bookkeeping guidelines that call for a high degree of
verification before a company can make a legal claim to any profit.”

INTERPRET:
 Accounting is a principle that requires company accounts to be prepared with cautions
and high degree of verification.
 Accounting is a principle that requires company accounts to be prepared with cautious
and high degree of verification.
 All portable resources are recorded when they are discovered while gains can only be
registered when they are fully realized.
 If accountant has two solutions to choose from when facing an accounting challenge, one
that yield inferior numbers should be selected.
 Accounting conventions are generally accepted principles and are not considered legally
binding.
 These principles help and assist business in establishing procedures to record business
transactions that have not yet been fully addressed by accounting standards.
 These conventions don’t have any legal obligations yet accountants need to use these
conventions to record financial transactions.
 These conventions are generally accepted guidelines around the globe.
 These accounting conventions have changed with time because of finical conditions.

METHODS OF ACCOUNTING CONVENTIONS:

Accounting conventions is a practice adopted by an entity based on a general agreement between
the accounting agencies and assisting the accountants during the preparation of the company
financial statement. To improve the quality of financial information, international financial
institutions may alter or modify any accounting conventions.

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Following are the method of accounting conventions which are used generally all over the globe.

I. Convention of conservatism
II. Convention of consistency
III. Convention of materiality
IV. Convention of full disclosure

1. CONVERTISIM:
The convention of CONVERTISIM state that when there are two possible values
available for transaction, the lowest one should be recorded on the income/asset side.
This ensures that the possibility of any loss is taken care of. This convention aims to
understate the assets and profits for dealing any loss. The assets and profits are recorded
keeping in mind the worst possible scenarios. This practice helps to enhance the
reliability of the financial statement.
Example:
When entry is recorded, accountants record it lower cost and the realizable value.

2. CONSISTENCY:
The accounting convention of consistency, as the name suggests, states that there should
be a consistent application of accounting principle for different cycles. If the company
has chosen one method, it should also apply the same method in future. This convention
is important because it makes financial statement of different accounting periods
comparable.
Example:
The business should use the same method of calculating depreciation over different
accounting periods. Another example can be the valuation of inventory valuation using
FIFO/AVCO policy. In simple words, if the business has valued inventory with FIFO, it
should continue to use FIFO in the next accounting period as well.

3. MATERIALITY:
According to convention of materiality, all the related material facts should be included
in financial statements. These facts are very important for financial decision-makers.
Materiality refers to any information that can influence the decision of the financial
statement user. It differs from company to company; for a multinational company,
specific information might not be material, but for a small firm, the same information can
be material. So, it is about the context of analysis.

Example:
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Consider a large firm that has encountered a loss of Rs.100, 000 from specific customer.
The net income of the company is Rs.200, 000,000. So this loss of 0.05% may be
immaterial for the firm. On the other hand, a small firm with a smaller net income
amounting $150,000 will consider this loss as material information.

4. FULL DISCLOSURE:
s

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