POA

10 Option 2
Accounting as a System
Accounting Concepts and Conventions

Objectivity and Subjectivity

The objectivity principle states that accounting information and financial reporting
should be independent and supported with unbiased evidence. This means that
accounting information must be based on research and facts, not merely a
preparer’s opinion. The objectivity principle is aimed at making financial
statements more relevant and reliable.

The concept of relevance implies that financial statements can have predictive
value and feedback value. This means the financial statements are accurate and can
be used to predict future company performance.

The concept of reliability implies that financial information can be verified by

many sources with evidence and that all financial information is presented. In other
words, the favorable and unfavorable financial information is presented in the
financial statements.

The two concepts of relevance and reliability encompass the objectivity principle.
By making financial statements more relevant and reliable, the objectivity principle
makes the financial information more usable for investors and creditors.

https://www.myaccountingcourse.com/accounting-principles/objectivity-principle

When the approach is subjective, it means you wish to use your own judgement or
method of valuation, even though no one else may agree to it.

Financial accounting seeks objectivity and thus it must have rules which lay down
the way in which the activities of the business are recorded. These are explained
below.
Accounting Concepts and Conventions

In drawing up accounting statements, whether they are external "financial

accounts" or internally-focused "management accounts", a clear objective has to be
that the accounts fairly reflect the true "substance" of the business and the results
of its operation.

The theory of accounting has, therefore, developed the concept of a "true and fair
view". The true and fair view is applied in ensuring and assessing whether
accounts do indeed portray accurately the business' activities.

To support the application of the "true and fair view", accounting has adopted
certain concepts and conventions which help to ensure that accounting information
is presented accurately and consistently.

Accounting Conventions

The most commonly encountered convention is the "historical cost convention".

This requires transactions to be recorded at the price ruling at the time, and for
assets to be valued at their original cost.

Under the "historical cost convention", therefore, no account is taken of changing

prices in the economy.

The other conventions you will encounter in a set of accounts can be summarised
as follows:

Monetary measurement

Accountants do not account for items unless they can be quantified in monetary
terms. Items that are not accounted for (unless someone is prepared to pay
something for them) include things like workforce skill, morale, market leadership,
brand recognition, quality of management etc.

Separate Entity

This convention seeks to ensure that private transactions and matters relating to the
owners of a business are segregated from transactions that relate to the business.
Realisation

With this convention, accounts recognise transactions (and any profits arising from
them) at the point of sale or transfer of legal ownership - rather than just when cash
actually changes hands. For example, a company that makes a sale to a customer
can recognise that sale when the transaction is legal - at the point of contract. The
actual payment due from the customer may not arise until several weeks (or
months) later - if the customer has been granted some credit terms.

Materiality

An important convention. As we can see from the application of accounting

standards and accounting policies, the preparation of accounts involves a high
degree of judgement. Where decisions are required about the appropriateness of a
particular accounting judgement, the "materiality" convention suggests that this
should only be an issue if the judgement is "significant" or "material" to a user of
the accounts. The concept of "materiality" is an important issue for auditors of
financial accounts.

Accounting Concepts

Four important accounting concepts underpin the preparation of any set of

accounts:

Going Concern

Accountants assume, unless there is evidence to the contrary, that a company is not
going broke. This has important implications for the valuation of assets and
liabilities.

Consistency

Transactions and valuation methods are treated the same way from year to year, or
period to period. Users of accounts can, therefore, make more meaningful
comparisons of financial performance from year to year. Where accounting
policies are changed, companies are required to disclose this fact and explain the
impact of any change.
Prudence

Profits are not recognised until a sale has been completed. In addition, a cautious
view is taken for future problems and costs of the business (they are "provided for"
in the accounts" as soon as there is a reasonable chance that such costs will be
incurred in the future.

Matching (or "Accruals")

Income should be properly "matched" with the expenses of a given accounting

period.

Key Characteristics of Accounting Information

There is general agreement that, before it can be regarded as useful in satisfying

the needs of various user groups, accounting information should satisfy the
following criteria:

Understandability

This implies the expression, with clarity, of accounting information in such a way
that it will be understandable to users - who are generally assumed to have a
reasonable knowledge of business and economic activities

Relevance

This implies that, to be useful, accounting information must assist a user to form,
confirm or maybe revise a view - usually in the context of making a decision (e.g.
should I invest, should I lend money to this business? Should I work for this
business?)

Consistency

This implies consistent treatment of similar items and application of accounting

policies

Comparability

This implies the ability for users to be able to compare similar companies in the
same industry group and to make comparisons of performance over time. Much of
the work that goes into setting accounting standards is based around the need for
comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate,
complete (nothing significant missed out) and capable of being verified (e.g. by a
potential investor).

Objectivity

This implies that accounting information is prepared and reported in a "neutral"

way. In other words, it is not biased towards a particular user group or vested
interest

https://www.tutor2u.net/business/reference/accounting-concepts-and-conventions

More information from another site

https://keydifferences.com/difference-between-accounting-concept-and-convention
.html

Accounting is a business language, which is used to communicate financial

information to the company’s stakeholders, regarding the performance, profitability
and position of the enterprise and help them in rational decision making. The
financial statement is based on various concepts and conventions. Accounting
concepts are the fundamental accounting assumptions that act as a foundation for
recording business transactions and preparation of final accounts.

Accounting Concept Vs Accounting Conventions

 BASIS FOR ACCOUNTING ACCOUNTING
COMPARISON CONCEPT CONVENTION

Meaning Accounting concepts Accounting conventions

refers to the rules of implies the customs or
accounting which are to practices that are widely
be followed, while accepted by the accounting
recording business bodies and are adopted by
transactions and the firm to work as a guide
preparing final accounts. in the preparation of final
accounts.

What is it? A theoretical notion A method or procedure

Set by Accounting bodies Common accounting

practices

Concerned with Maintenance of accounts Preparation of financial

statement

Biasness Not possible Possible

Definition of Accounting Concept

Accounting Concepts can be understood as the basic accounting assumption, which
acts as a foundation for the preparation of financial statement of an enterprise.
Indeed, these form a basis for formulating the accounting principles, methods and
procedures, to record and present the financial transactions of business.
These concepts provide an integrated structure and rational approach to the
accounting process. Every financial transaction that occurs is interpreted taking
into consideration the accounting concepts, which guides the accounting methods.

● Business Entity Concept: The concept assumes that the business enterprise
is independent of its owners.
● Money Measurement Concept: As per this concept, only those transaction
which can be expressed in monetary terms are recorded in the books of
accounts.
● Cost concept: This concept holds that all the assets of the enterprise are
recorded in the accounts at their purchase price
● Going Concern Concept: The concept assumes that the business will have a
perpetual succession, i.e. it will continue its operations for an indefinite
period.
● Dual Aspect Concept: It is the primary rule of accounting, which states that
every transaction affects two accounts.
● Realisation Concept: As per this concept, revenue should be recorded by
the firm only when it is realized.
● Accrual Concept: The concept states that revenue is to be recognized when
they become receivable, while expenses should be recognized when they
become due for payment.
● Periodicity Concept: The concept says that financial statement should be
prepared for every period, i.e. at the end of the financial year.
● Matching Concept: The concept holds that, the revenue for the period,
should match the expenses.

Definition of Accounting Convention

Accounting Conventions, as the name suggest are the practice adopted by an

enterprise over a period of time, that rely on the general agreement between the
accounting bodies and helps in assisting the accountant at the time of preparation
of financial statement of the company.

For the purpose of improving quality of financial information, the accountancy

bodies of the world may modify or change any accounting convention. Given
below are the basic accounting conventions:
 ● Consistency: Financial statements can be compared only when the
accounting policies are followed consistently by the firm over the period.
However, changes can be made only in special circumstances.

● Disclosure: This principle state that the financial statement should be

prepared in such a way that it fairly discloses all the material information to
the users, so as to help them in taking a rational decision.

● Conservatism: This convention states that the firm should not anticipate
incomes and gains, but provide for all expenses and losses.

● Materiality: This concept is an exception to the full disclosure convention

which states that only those items to be disclosed in the financial statement
which has a significant economic effect.

Key Differences between Accounting Concept and Convention

The difference between accounting concept and convention are presented in the
points given below:

1. Accounting concept is defined as the accounting assumptions which the

accountant of a firm follows while recording business transactions and
preparing final accounts. Conversely, accounting conventions imply
procedures and principles that are generally accepted by the accounting
bodies and adopted by the firm to guide at the time of preparing the financial
statement.

2. Accounting concept is nothing but a theoretical notion that is applied while

preparing financial statements. On the contrary, accounting conventions are
the methods and procedure which are followed to give a true and fair view
of the financial statement.

3. While accounting concept is set by the accounting bodies, accounting

conventions emerge out of common accounting practices, which are
accepted by general agreement.
 4. The accounting concept is basically related to the recording of transactions
and maintenance of accounts. As against, the accounting conventions focus
on the preparation and presentation of financial statements.

5. There is no possibility of biases or personal judgement in the adoption of

accounting concept, whereas the possibility of biases is high in case of
accounting conventions.

Conclusion

To sum up, the accounting concept and conventions outline those points on which
the financial accounting is based. Accounting concept does not rely on accounting
convention, however, accounting conventions are prepared in the light of
accounting concept.