Accounting Convention Relationship with Accounting Standards
In accounting, there exist conventions, concepts, assumptions, and standards. In standardizing the financial reporting process, concepts like relevance, comparability, materiability, and dependability are supported by accounting conventions.
When a particular situation is not mentioned in the accounting standard, then the accounting convention comes to the rescue. This means that accounting conventions covercover the areas where accounting standards don’t exist. In case of an oversight organization or regulatory body such as the Financial Accounting Standards Board (FASB) or the Securities Exchange Commission (SEC) creates a rule that is covered in the accounting convention, then this accounting convention is no longer relevant.
The area and scope of accounting standards is steadily broadening thus making the use of accounting conventions narrower. Further, these conventions are flexible, i.e., with time different ideas, options, and dimensions can be created to effectively and efficiently record business transactions.
Accounting conventions are essential as they ensure that there is uniformity in recording transactions among the different organizations. It becomes easier for investors to evaluate and comparing the performance of different organizations, including competitors of the same industry, using a standardized technique. This does not mean, that the accounting conventions are perfect. Sometimes, due to their vagueness and improper explanation, accountants and users of several companies have to modify and groom to their benefit.