This article contains comprehensive and insightful information on concepts and conventions of accounting.
It’s important to keep financial records for reference purposes. Accounting concepts and conventions form the starting point for keeping financial records and transactions.
An accountant should understand the importance of concepts and conventions of accounting to ensure that transactions and financial records are taken accurately. It’s also important for an accountant to know the necessary procedures to follow and avoid errors that can lead to losses.
If you are an accountant in a firm, you should know the difference between the concepts and conventions of accounting. You should also know the meaning of concepts and conventions to improve your skill and ability.
In this article, we have explained the difference and importance of both terms (concepts and conventions) and all you need to know. Before we go into details, let’s start with understanding the concepts of accounting.
Understanding Concepts of Accounting
An accountant working in a firm needs to understand the concepts of accounting. So what are the concepts of accounting?
Concepts of accounting are assumptions for preparing final accounts. It also serves as a foundation for recording business transactions for firms and financial institutions. Accounting concepts are the language that passes important information.
With the concepts of accounting, an accountant can classify and report financial and business transaction records to stakeholders. Concepts of accounting are ideas used to systemize the process of accounting.
Accounting concepts define constraints and parameters of how financial institutions or firm functions. Accountants developed accounting concepts and they use their experience to set up the term.
Now let us look at some concepts of accounting
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Consistency
On the subject of concepts and conventions of accounting, first concept we will be looking at is consistency. Transactions and valuation methods are treated in the same manner by accountants annually. By doing so, accountants can easily compare financial performance from a particular period to the next. This is done to keep a track record of financial performances over the years.
Business Entity
A business entity is a concept that refers to the assumption that an enterprise is independent of its owner. This simply means that if an action is taken on a business, it will not affect its owner in any way.
Cost
This concept involves accountants recording transactions and writing the cost of the purchase amount irrespective of the actual amount. Accountants do this to avoid recording arbitrary values.
Going Concern
Accountants working with enterprises do not assume that a company is going bankrupt. They need to see a piece of evidence showing that the company is going bankrupt.
Dual Aspect
The dual aspect is the belief that any transaction made affects two accounts. It is believed that the transaction affects the giver and receiver as well.
Money Measurement
When accountants are operating, they will only record monetary terms and values in their record books. Accountants are not concerned about other factors and matters.
Matching
Here, accountants will match income with expenses during a particular accounting period. The accountants do this to measure profitability for that given period.
Prudence
Being an accountant is a job one cannot afford to make silly mistakes. Accountants take the blame for a slight error in their job, and they pay for any monetary losses in their record.
To be very cautious in their job, accountants do not recognize profits until a sale is completed.
Periodicity
Here, accountants record financial statements and transactions at the end of the year. They record financial statements at the end of a financial year to evaluate financial performance.
Realization
When firms record transactions, they only record a transaction after they must have known the total amount they received.
Are Concepts of Accounting Important?
As we said earlier, the concepts and conventions of accounting are assumptions for preparing final accounts. In general, concepts of accounting create a universal procedure for firms and financial institutions to follow.
Through concepts of accounting, firms can create rationality and cohesiveness when making a financial decision such as budget planning. Concepts of accounting are beneficial for these reasons.
- Concepts of accounting create a basis for correcting accounting disputes which may occur at any point.
- Accounting concepts set accounting standards for enterprises and companies.
- Accounting concepts confirm the financial records taken by accountants.
- Concepts of accounting ensure organizations and enterprises are not involved in financial fraud when completing their financial reporting.
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Understanding Conventions of Accounting
We are still on the subject of concepts and conventions of accounting.
Here, we want to explain the conventions of accounting and why it’s important. Conventions of accounting are collections of guidelines used to assist enterprises to make decisions on how to track specific business transactions.
Conventions of accounting assist enterprises to monitor business transactions that are not fully addressed according to the accounting standards of the company.
However, the guidelines are not legally binding, but they are accepted by most accounting bodies. With the help of accounting conventions, accounting bodies can provide consistency, as well as create clarity. They also solve practical problems which occur during the preparation of financial statements.
As new final issues, changes and products occur, accounting practices establish new conventions of accounting.
The major conventions of accounting include the following.
Consistency
For accountants to keep things reliable and in place, accountants will use the same accounting principle in different accounting cycles. Through this process, accountants can easily access the financial performance of a company in a particular period.
Since the accounting principle is the same, accountants can assess and compare how the company performed during a financial period.
Conservatism
Here, accountants take precautions when they are providing estimates for liabilities and assets. Accountants make safe actions, and they also consider the worst that could happen to the financial future of a firm.
Full Disclosure
Accountant bodies provide and share every piece of information they consider essential regardless of any damage it causes to the company.
Materiality
As part of making decisions to review financial statements, enterprises will share information such as an event that is material.
Are Conventions of Accounting Important?
Of course, conventions of accounting are important as concepts of accounting. Companies create their procedures for how to complete an operation with the help of accounting conventions.
Besides that, accounting conventions are also beneficial in several ways;
- Accounting conventions provide standardized methods for companies to use.
- Conventions of accounting ensure that accounting bodies take the perfect transaction record just as they are.
- With conventions of accounting, accounting bodies can easily compare and review financial periods.
- Accounting conventions improve the procedures of comparing firms with competitors, as they all follow and observe the same processes.
Concepts and Conventions of Accounting
Concepts and conventions of accounting help create the process of taking records of financial information and important data. However, concepts and conventions of accounting serve different purposes, and there are differences between them.
Below are the differences between concepts and conventions of accounting.
Bias
Although concepts of accounting are universal and don’t have the chance of bias, the possibility of accounting conventions being biased is high. Why do accounting conventions have a high possibility of being biased?
Accounting conventions have a high possibility of being biased because different accounting practices set conventions of accounting. The different accounting practices may use personal judgement and beliefs when setting up accounting conventions.
Priorities
When working on the maintenance of accounts, accounting concepts are used. On the other hand, accounting conventions are used by accountants when they are preparing a financial statement. Accounting conventions are normally used to prepare financial statements at the end of an accounting cycle.
Legal Recognition
Concepts of accounting are legally recognized by accountants, while accounting conventions are not recognized in the same manner.
The difference between concepts and conventions of accounting is that accounting concepts fall under the General Accepted Accounting Principles (GAAP), while accounting conventions do not.
The General Accepted Accounting Principles (GAAP) are standards in accounting adopted by the United States Securities and Exchange Commission.
Follow through
Conventions of accounting are considered less restrictive and they are not followed by many firms. On the other hand, accountants follow accounting concepts as it’s a traditional process.
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Uniform Adaptation
Several companies agreed to uniformly accept and adapt concepts of accounting. The same thing does happen with accounting conventions. Enterprises do not accept or adapt accounting conventions.
This is because accounting conventions vary from enterprise to enterprise. So companies accept and adapt accounting concepts to accounting conventions.
Places Where Accounting Conventions Apply
Accounting conventions may not be uniformly adapted by enterprises, but they can be of benefit in other ways.
For instance, accounting conventions can be applied to inventory valuation. When there is a need to determine the reporting values of inventory, accounting conventions show that the replacement or lower historical cost should be the monetary value.
Furthermore, accounting conventions will also dictate that changes to line items must not be made for market value or inflation. For instance, when a building is purchased for a specific amount, there should be no changes to the price in the record books irrespective of the building’s current worth.
Frequently Asked Questions about Concepts and Conventions of Accounting
Below are the frequently asked questions about concepts and conventions of accounting.
What are the concepts of accounting?
Concepts of accounting are assumptions for preparing the final account. It also serves as a foundation for recording business transactions for firms and financial institutions. Accounting concepts are the language that passes important information.
There are several fundamentals of accounting practice which include separate entity concept, money measurement concept, going concern concept, dual aspect concept, accounting period concept, and matching principle, among others.
What are the conventions of accounting?
Conventions of accounting are the collection of guidelines used to assist enterprises to make decisions on how to track specific business transactions.
Conventions of accounting assist enterprises to monitor business transactions that are not fully addressed according to the accounting standards of the company.
What is a convention of conservatism?
The term conventions of conservatism dictate that a company needs to make provisions for a doubtful liability.
Conclusion
Concepts and conventions of accounting are both helpful in creating a universal procedure for recording financial details and transactions.
Accounting concepts are important as they create a process that accounting firms can follow. Companies can create procedures on how to complete operations with the help of accounting conventions.
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