Accounting conventions are the rules and regulations that are required to be followed by accountants while maintaining company accounts and carrying out financial transactions. These conventions have been followed for many years, and they are changed only if the need arises. Due to the changing ways of businesses and more competitive environment, they modifications have been made in them to increase the efficiency of the accounting practices.
Important Accounting Conventions
Among the accounting conventions, the one dealing with complete disclosure is the most important one. It makes it binding on accounting professionals, that they disclose all important data and statistics to investors, to make them fully aware of the financial performance of the company.
Active investors are largely dependent on the financial data provided to them, when making investment decisions. Hence, any wrong data disclosed can lead to a big loss to the investors. Therefore, disclosing the right details, at the right time is mandatory and a universally accepted principle or convention in accounting.
The convention of consistency is also equally important, and needs to be studied by all people related to the field. Consistency is needed in all walks of human life and accounting is no exception for this. By maintaining a consistency in the way you value stock of a company, the way depreciation is calculated, and the way profitability and turnover growth is judged, the investors will find it easy to distinguish the profitable and financially strong companies from the non-performing ones. If entirely different parameters are used for judging the financial performance of the company every year, then it may lead to some sort of confusion in the minds of people and this can lead to wrong investor decisions. The consistency conventions however do not restrict the accountants from not using or introducing advanced or new methods and techniques of data presentation and calculations.
The next accounting convention is that of conservatism. This literally means that the accountant should play safe and take into consideration the factors which can pose a threat to the growth and earnings of a business. The business environment is challenging and companies have to tackle many financial and political situations. These can have a direct impact on the performance of the company. Hence, taking this into consideration is a must while preparing the accounting statements. These things need to be discounted from the earnings estimates calculated by the accountants.
The accounting convention of materiality is also the one which needs to be discussed. According to this convention, only those events and transactions which are highly important and have an effect on the overall business should be considered while preparing the statements. If the accountants go on including the insignificant or those items which are not that important, then it might be a wastage of time and diversion of attention from the main topic for the readers.
The convention of separate entity is also a major one in accounting. As per the meaning of this convention, the financial transactions of the owners or the promoters of a business are always considered to be different from those of the company. The convention of realization is useful in knowing the transactions that take place in an effective way.
These were the accounting conventions which you should be aware of to generate statements which are fully true and useful. These conventions can be a guiding light in increasing your accuracy in accounting practices.