Accounting convention is a common practice or guideline used to address specific accounting issues not fully covered by formal accounting standards.
Accounting conventions are:
Conservatism:
The conservatism principle, also known as the prudence principle, is an accounting convention that advises caution when recording revenues and expenses. Under this principle, accountants should recognize expenses and liabilities as soon as possible when there is uncertainty about the outcome, but revenues and assets should only be recorded when they are assured of being received. This approach helps prevent overstatement of financial health and ensures that financial statements are more likely to understate rather than overstate a company’s financial position.
Consistency:
The consistency principle is an accounting convention that requires a company to use the same accounting methods and procedures from one accounting period to the next. This ensures comparability of financial statements over time, allowing stakeholders to accurately assess a company’s performance and financial position. Any changes in accounting methods must be disclosed and explained in the financial statements to maintain transparency and ensure that users can still make meaningful comparisons.
Materiality:
The materiality principle is an accounting convention that states that all significant items, those that could influence the decision-making of users of the financial statements, must be accurately reported. An item is considered material if its omission or misstatement could affect the economic decisions of users taken based on the financial statements. This principle allows accountants to disregard trivial matters and focus on items that have a meaningful impact on the financial statements, thus ensuring that the information presented is relevant and useful.
Full Disclosure:
The full disclosure principle is an accounting convention that requires a company to provide all necessary information in its financial statements to ensure that users can make informed decisions. This includes not only the financial data but also any relevant explanations, notes, and supplementary information that could impact users’ understanding of the company’s financial position and performance. The principle ensures transparency and completeness, preventing the omission of important details that might mislead stakeholders.