Accounting Conventions

Accounting conventions are the rules and regulations which are required to be followed by the accountants while they maintain the accounts of transactions of companies. These conventions are followed from many years back and they are changed only if the need arises. Due to the changing ways of businesses and more competitive environment, they can be changed slightly for increasing the efficiency of the accounting practices.

Important Accounting Conventions

Among the accounting conventions, the convention of complete disclosure is the most important and well-known one. It actually means that the accounting professionals should disclose all important data and statistics to the investors and all interested readers and people to make them fully aware of the financial performance of the company. The active investors depend largely on the financials provided to them and hence, any wrong data disclosed can lead to a big loss to the investors because of wrong decisions taken on their part. So, 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 accounting 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 charged 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 decisions taken by them. 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 generally accepted accounting principles will help you know things better.

The next accounting convention we all should be aware of is the convention 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 in today's business world is challenging and companies have to tackle many financial and political situations. These can have a direct impact on the performance of the company and 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 by the accountants. 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. So, use this data to increase your accuracy in accounting practices. Good luck!