Importance of Accounting Convention

What is Accounting Convention?

Accounting Conventions are certain guidelines or principles that help organizations determine the proceedings of recording business transactions that are complicated, unclear, or not fully addressed. Although these restrictions and guidelines are not legally binding, they are generally accepted by the authorities as these principles help maintain consistency and avoid practical obstacles during the preparation of the financial statements of businesses. Accounting conventions are used in the standard financial reporting system for comparing different forms of transactions, analyzing their significance, applicability, and complete disclosure in the financial statements. Accountants try to implement the principles of accounting conventions while preparing accounting statements and reports....

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....

Methods of Accounting Conventions

1. Conservatism: The conservatism principle means to play safe while recording transactions considering all the possible negative scenarios. There are particular stances where the conservatism principle can be criticized. For instance, the market value and book value are two values for recording a particular asset. Considering the worst-case scenario as per the accounting convention, the lower value of the asset is considered. Further, in some other cases, private reserves are mentioned representing excess allocation for bad and doubtful debts, depreciation, etc. This violates the principle of the true and fair value of financial conditions....

Importance of Accounting Convention

1. Separate Entity: The accounting conventions are important while dealing with different entities in the financial world. They ensure that organizations despite their type of business can adopt standardized guidelines for reporting financial transactions by setting uniform criteria. This consistency and standardization are important for building a uniform ground for businesses encouraging fair comparisons across organizations and developing a thorough knowledge of financial statements among stakeholders....

Advantages of Accounting Convention

1. Credibility: Financial statements that are prepared in compliance with accounting guidelines and standards are far more accurate and dependable. Investor confidence is bolstered by it....

Disadvantages of Accounting Convention

1. Uncertainty: A lot of accounting rules leave out important details about ideas or transactions that are documented in financial accounts. As a result, they are making it simple for management to manipulate certain numbers with the help of the accountant, such as depreciation and provisions for bad debt....

Areas Where Accounting Conventions Apply

1. Valuation of Inventory: Inventory valuation can be done using accounting conservatism. Conservatism implies that the lower of historical cost or replacement cost should be the monetary value for establishing the reporting value of inventory....

Conclusion

Accounting conventions are therefore very essential in ensuring consistent, transparent and reliable financial reporting. Although they are not flawless, they provide a useful framework which businesses follow in preparing financial statements that are meaningfully consistent and comparable by the investors, lenders and other interested parties. As the business world advances, it is inevitable that accounting conventions would progress hand in hand with it. Until then, they would continue to persist as an important aspect in the preparation of financial statements....

Accounting Convention – FAQs

What is the difference between accounting concepts and accounting conventions?...