Accounting Conventions | Types of Accounting Conventions

                      Today let us try to understand accounting conventions and different types of accounting convention. 

Accounting Conventions

          Accounting Conventions are the customs or practices which have been in force for a long period and which guide the accountants while recording accounts and help to communicate financial data clearly. Thus in common words we can say that they are the practices or customs followed by accountant in order to record the transaction without any error and communicate the financial data. They also help to prepare and present the financial statements easily and make the financial statement more clear and meaningful.

Types of Accounting Conventions

          The Accounting Conventions are classified into following types. They are

1.     Convention of Materiality.

2.     Convention of Conservatism.

3.     Convention of Consistency.

4.     Convention of Full Disclosure.

ACCOUNTING CONVENTIONS AND TYPES OF ACCOUNTING CONVENTIONS

                Now lets in detail see one by one

1.   Convention of Materiality:

                    The Convention of Materiality means that in accounting a detail record is made of only those transactions which are material(significant) to the users of accounting information.  The rationale behind the materiality principle is that if every business transaction is recorded in the books of accounts then it will be an unnecessary burden on accounting details.   

The American Accounting Association defines materiality convention as “The item should be regarded as material, if there is reason to believe that knowledge of it would influence the decision of the informed investor.”

2.    Convention of Conservatism: 

                   The Convention of Conservatism means the convention of caution or the policy of playing safe. This principle implies that “provide for all possible losses, but anticipate no profits.” In general terms it means that the accounting records and the financial statements of a business  all the prospective losses, risks and uncertainties should be taken note-off and provided for but prospective profits should be ignored. Based on this principle provision for doubtful debts, provision for discounts on debtors, provision for taxation and other provisions. It is because of this principle that the trade is valued at the cost price or market price whichever is lower. The rationale behind this principle is that future is uncertain.

3. Convention of Consistency:

                     The convention of consistency signifies that the accounting principles should be remain consistent i.e. unchanged from one accounting year to another accounting year. For instance, for a fixed asset the method adopted for depreciation calculation should be same from year to year. The idea behind this principle is that unless the same accounting practices and methods are adopted from year to year and comparison of accounting figure from year to year would become difficult which would lead in difficulty in drawing conclusions about the progress of the firm over the number of years.

According to Eric Kohler there are three types of consistencies. They are,

a.     Vertical Consistency implies that the same policies and practices are to be followed in preparing various financial statements.

b.     Horizontal Consistency implies that the same accounting rules, policies and practices are to be followed from year to year

c.      Third dimensional consistency implies that same accounting rules, policies and practices are to be followed by all the firms in the industry while preparing their financial statements.

4.   Convention of Full Disclosure:

                        The Convention of  Full Disclosure means that the material facts should be disclosed in the financial statement with more details . For instance, in case of sundry debtors not only total amount should be disclosed but also the amount of goods, secured debtors and unsecured debtors and the amount doubtful from the debtors should be maintained. The idea behind this is that financial statements are meant for external users who make informed decisions based on this judgments. Exclusion of material facts helps leads to incomplete and unreliable financial statements.

            I hope now you have understood what are accounting conventions? and also different types of accounting conventions
    
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