The term “Accounting Conventions” refers to the customs or
traditions which are used as a guide in the preparation of accounting reports
and statements. The conventions are derived by usage and practice. The
accountancy bodies of the world may charge any of the convention to improve the
quality of accounting information accounting conventions need not have
universal application. Following are important accounting conventions in use:
1.)
Convention of consistency:-
According to this convention the accounting practices should remain unchanged
from one period to another. It requires that working rules once chosen should
not be changed arbitrarily and without notice of the effect of change to those
who use the accounts. For example, stock should be valued in the same manner
every year. Similarly depreciation is charged on fixed assets on the same
method year after year. If this assumption is not followed, the fact should be
disclosed together with reasons.
The principle of consistency plays its role particularly when
alternative accounting methods is equally acceptable. Any change from one
method to another method would result in inconsistency; they may seem to be
inconsistent apparently. In case of valuation of stocks if the company applies
the principle “at cost or market price whichever is less” and if this principle
accordingly result in the valuation of stock in one year at cost and the market
price in the other year, there is no inconsistency here. It is only an
application of the principle.
An
Enterprise should change its accounting policy in any of the following
circumstances
only.
(i)To
bring the books
of accounts in
accordance with the
issued accounting
standard.
(ii) To
compliance with the provision of law.
(iii)
When under changed circumstances it is felt that new method will reflect more
true and fair picture in the financial statement.
2.)
Convention of Conservatism:-
This is the policy of playing sale game. It takes into consideration all
prospective losses but leaves all prospective profits financial statements are
usually drawn up on a conservative basis anticipated profit are ignored but
anticipated losses are taken into account while drawing the statements
following are the examples of the application of the convention of
conservatism.
(i) Making
the provision for doubtful debts and discount on debtors.
(ii) Valuation
of the stock at cost price or market price which ever is less. (iii)Charging of
small capital items, like crockery to revenue.
(iv)Showing joint life policy at surrender value as against the
actual amount paid.
(v) Not
providing for discount on creditors.
3.) Convention of Disclosure:- Apart from statutory requirement, good
accounting practice also demands that significant information should be
disclosed in financial
statements.
Such disclosures can also be made through footnotes. The purpose of this
convention is to communicate all material and relevant facts concerning
financial position and results of operations to the users. The contents of
balance sheet and profit and loss account are prescribed by law. These are designed
to make disclosures of all materials facts compulsory. The practice of
appending notes relative to various facts and items which do not find place in
accounting statements is in pursuance to the convention of full disclosure of
material facts. For example;
(a)
Contingent liability appearing as a note.
(b) Market
value of investments appearing as a note.
The convention of disclosure also applies to events occurring
after the balance sheet date and the date on which the financial statement are
authorized for issue. Such events include bad debts, destruction of plant and
equipment due to natural calamities’, major acquisition of another enterprises,
etc. such events are likely to have a substantial influence on the earnings and
financial position of the enterprises. Their not-disclosure would affect the
ability of the users for evaluations and decisions.
4.)
Convention of Materiality:-
According to this conventions, the accountant should attach importance to
material detail and ignore insignificant details in the financial statement. In
materiality principle, all the items having significant economics effect on the
business of the enterprises should be disclosed in the financial statement.
