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Accounting Convention Definition
Accounting conventions are standards, customs or guidelines associated with the practical application of accounting principles, and are aimed at bringing about consistency in the maintenance of accounts. Accounting conventions are generally accepted principles and are not considered legally binding. These principles assist businesses in establishing procedures to record business transactions that have not yet been fully addressed by accounting standards.
A Little More on What is an Accounting Convention
Accounting conventions are vital to the accounting profession, since they bring about uniformity in the process of recording transactions by multiple organizations. Such uniformity makes it possible to reliably compare the financial results, financial position, and cash flows of different organizations.·Accounting conventions typically support concepts such as relevance, reliability, materiality and comparability, which goes a long way in helping to standardize the financial reporting process.
Types of Accounting Conventions
Accounting conventions can be classified into four main types; they are:
- The Convention of Disclosure: The convention of disclosure advocates the full disclosure of all material information, whether favourable or otherwise, in the accounting statements of a business enterprise. This convention mandates that all relevant information pertaining to financial position as well as the results of operations, that is deemed to be of material value to proprietors, creditors and debtors must be disclosed, and that all accounting statements must be prepared honestly. The convention of disclosure holds greater importance in the case of businesses where the ownership is separate from the management. Material events that can significantly affect a business include bad debts, destruction of plant or machinery, etc.
- The Convention of Consistency: This convention advocates the continuous observation and application of the rules and practices of accounting. The uniformity and consistency of accounting rules is vital to profit and loss calculations as well as comparisons of company performance. Frequent changes in the treatment of accounts will, most definitely, make such accounts inconsistent, and hence, less reliable. In other words, for accounting information to be accepted as reliable, it must be truthful, accurate and complete.
- The Convention of Conservatism: The convention of conservatism essentially anticipates an uncertain future and as such, regards profit improbable while providing for all possible losses. In other words, for every two available values of a transaction, the convention of conservatism records the lower value. As such, application of these principles almost always results in an understatement of resources and income.
- The Convention of Materiality: The convention of materiality advocates the recording of all material facts, while eliminating insignificant information. Material facts are those pieces of information that can potentially influence the decision of informed investor. Although theoretically all information should be treated alike, the convention of materiality places great emphasis on the economic significance of an item as a determinant of its importance in accounting. It should be noted that any item deemed material by a business can be treated as unimportant by another business. In the same way, an item that is considered material during a particular period may be treated as unimportant in subsequent periods of time.
Importance of Accounting Conventions
Over the years, accounting conventions have successfully addressed the shortcomings of established accounting standards by helping govern specific situations for which there exists no specific guidelines in the accounting standards. Accounting conventions are an important component of the accounting process since they offer an accurate and reliable means of comparing financial performance from industry to industry as well as from year to year. Several businesses corresponding to different industries have utilized accounting conventions to regulate the preparation of quarterly balance sheets, income statements, and annual reports.
Reference for “Accounting Convention”
Academic research on “Accounting Convention”
Applicability of the conservatism accounting convention in China: Empirical evidence, Lin, Z. J., & Chen, F. (1999). Applicability of the conservatism accounting convention in China: Empirical evidence. The International Journal of Accounting, 34(4), 517-537. “Conservatism” is a widely accepted accounting convention in the industrialized world, but it has long been slated and prohibited in China under the orthodox ideological influences. To date, the conservatism convention has not been fully adopted or implemented in Chinese accounting although the Chinese government has made substantial efforts to reform its accounting system to bridge the gaps between the accounting practices in China and other industrialized countries in recent years. This study has, through a wide range questionnaire survey, empirically investigated the applicability of the conservatism accounting convention in China. We found that the survey respondents (consisted of business accountants, management, government officials, bank loan officers, investment analysts and auditors), in general, held no negative attitudes against the conservatism convention under the changing business environment in the country. There is clear evidence that various interested parties of business accounting would support an expanded adoption of “conservatism” in Chinese accounting. The study findings will facilitate a proper assessment of the future development of accounting standards and practices in China.
Report from Australia–The 1958 Accounting Convention, Goldberg, L. (1959). Report from Australia–The 1958 Accounting Convention. New York Certified Public Accountant (pre-1986), 29(000003), 162.
Trade-off and Choice between Accounting Convention and Concept Framework, Yi, T. U. (2005). Trade-off and Choice between Accounting Convention and Concept Framework. Journal of Shanxi Finance and Economics University, (5), 26.
Cultural and economic influences on current accounting standards in the People’s Republic of China, Graham, L. E., & Li, C. (1997). Cultural and economic influences on current accounting standards in the People’s Republic of China. The International Journal of Accounting, 32(3), 247-278. Accounting Principles in the People’s Republic of China have undergone dramatic reform since the 1970s. In moving toward a more market driven economy, the market structures and accounting rules have changed to the point that today many of the concepts and principles familiar in the most advanced economies are part of the Chinese regulations and laws. While China has forged many principles that are similar to Western and international practice, there are anomalies that may not be easily explained without a more detailed understanding of the cultural, economic and political environment now facing China. The principle of Guo Qing implies that change will be implemented only in conjunction with Chinese needs. As evidenced in the statutory restrictions on the value of certain contributed intangibles, the write-offs of accounts receivable and the discretionary write-downs of inventory for lower-of-cost-or-market considerations, there remain some areas of accounting practice that Chinese historical, cultural, and economic circumstances encourage an inexplicable result. Additionally, there remain differences in perspective that are more attributable to history than to specific accounting rules.
Accounting standards in the People’s Republic of China: Resp, Winkle, G. M., Huss, H. F., & Xi-Zhu, C. (1994). Accounting standards in the People’s Republic of China: Resp. Accounting Horizons, 8(3), 48.