Accounting conventions means customs and traditions established after a long usage to guide the preparation and presentation of accounting statement. The following are the important accounting conventions.
1. Consistency
This convention emphasizes the use of uniform accounting practices from one period to another. When this practice is followed, the result disclosed in the financial statement of one year are comparable with that of other years.
For example, if depreciation is charged on fixed assets under written down value method, the same method is to be followed from year after year. If the method of deprecation is changed to straight line method in the following year the amount of depreciation charged will be different and consequently, the profit changed causing comparison unfair.
2. Disclosure
According to this convention the FINA statement must disclose all the relevant and reliable information fully and fairly from time to time to shareholders, creditors, employees, government etc who are interested in the business.
3. Conservatism or prudence
According to this convention, the accounts should follow the rule of anticipating no profits but provide for all possible losses. It requires profits should neither be over stated nor anticipated. At the same time provisions are to be made to meet any possible losses. For valuation of closing stock this principle is followed I.e. closing stock is to be valued at cost price or market price which ever is lower. This prevents business concern from overstating its profits.
4. Relevance
As per this convention, the firm should give relevant accounting information whenever required with documentary evidence like, purchase or sale invoices, vouchers etc as a documentary proof of a transactions.
5. Feasibility or Materiality
Whether something should be disclosed or not in the financial statement while depends on whether it is material or not. Materiality depends on the amount involved in the transaction
1. Consistency
This convention emphasizes the use of uniform accounting practices from one period to another. When this practice is followed, the result disclosed in the financial statement of one year are comparable with that of other years.
For example, if depreciation is charged on fixed assets under written down value method, the same method is to be followed from year after year. If the method of deprecation is changed to straight line method in the following year the amount of depreciation charged will be different and consequently, the profit changed causing comparison unfair.
2. Disclosure
According to this convention the FINA statement must disclose all the relevant and reliable information fully and fairly from time to time to shareholders, creditors, employees, government etc who are interested in the business.
3. Conservatism or prudence
According to this convention, the accounts should follow the rule of anticipating no profits but provide for all possible losses. It requires profits should neither be over stated nor anticipated. At the same time provisions are to be made to meet any possible losses. For valuation of closing stock this principle is followed I.e. closing stock is to be valued at cost price or market price which ever is lower. This prevents business concern from overstating its profits.
4. Relevance
As per this convention, the firm should give relevant accounting information whenever required with documentary evidence like, purchase or sale invoices, vouchers etc as a documentary proof of a transactions.
5. Feasibility or Materiality
Whether something should be disclosed or not in the financial statement while depends on whether it is material or not. Materiality depends on the amount involved in the transaction
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