Accounting Conventions

Accounting conventions are customs and traditions, which are adhered to when recording transactions in the financial statement. They are methods or procedures that are widely accepted.Accounting Conventions are used by accountants to prepare internationally acceptable final accounts.

Examples of Accounting Conventions

The key accounting conventions are;

1. Materiality Convention-the issue of materiality cut across matters of information, monetary amount, procedure and nature. For instance, Error in description of an asset or wrong classification between capital and revenue expenditure would lead to materiality of information problem.

2. Consistency Convention-argues that Accounting practices should not change or must remain unchanged over a period of several years. That is if a transaction is classified as a fixed asset in the current period, it should not be treated as current asset in the next period. This does not mean that a firm cannot change the policy.

3. Conservatism Convention -conservatism states that when alternative valuations are possible, one should select the alternative which fairly represents economic substance of transactions but when such choice is not clear select the alternative that is least likely to overstate net assets and net income. It provides for all known expenses and losses by best estimates if amount is not known with certainty, but does not recognizes revenues and gains on the basis of anticipation.

4. Timeliness convention-this concept argue that every transaction must be recorded in proper its proper time. Normally, when the transaction is made, the same must be recorded in the proper books of accounts. In short, transaction should be recorded date-wise in the books. Delay in recording such transaction may lead to manipulation, misplacement of vouchers, misappropriation etc. of cash and goods. This principle is followed particularly while verifying day-to-day cash balance.

5. Industry practice convention- each industry has its own characteristics and features and in a similar way each one of them or firms in each industry follows the principles and assumption of accounting to perform their own activities. Some of them follow the principles, concepts and conventions in a modified way. For example, service industry and merchandise or manufacturing firms maintain their accounts in a specific manner. Similarly, non-profit making organizations prepare income and expenditure account to find out surplus or deficit.