Conventions are guidelines used in handling transactions that are yet to have specific accounting standards. However, when a standard has been established, it's overdue the accounting convention. As with concepts, it guides an accountant in the understanding of standards and the preparation of financial statements.
1. What's accounting conventions
An accounting convention is a guideline applied by an accountant in the recording of financial transactions and preparation of financial statements when there are no relevant laws, rules, principles, or standards to be applied. They are also referred to as the norms of accountants. Therefore, it is imperative that accounting practitioners understand their application.
Both accounting concepts and conventions are necessary in the preparation of financial statements. However, when there is an accounting standard such as the international financial reporting standard on a particular transaction, then it is the principles or rules in them that are applied to the transaction not the convention.
More so, in the development of financial reporting standards, accounting conventions and concepts are usually considered. Also, the developers of those standards apply the accounting conventions during their creation. In fact, the international financial reporting standards foundation has what is referred to as the IFRS conceptual framework that guides the preparation of the various IFRS standards.
Accounting conventions are mainly consistency, conservatism, materiality, and full disclosure. Consistency means that the agreed accounting methods, principles, and bases must be used continuously year after year unless there are good reasons to change them. Conservatism, also known as prudency, is to overstate expenses and understand income so as to protect the entity against unplanned events.
The IFRS foundation does not include this convention in their conceptual framework. Materiality states that all transactions of material value must be disclosed either in part or in full in the financial statements. While full disclosure implies that transactions relating to all users must be provided in the financial report.
2. Importance of accounting conventions
2.1 Serves as first aid
Where there is no IFRS, the conventions can serve as a first aid to the preparers of financial reports before a new standard is introduced.
2.2 Used in developing standards
It serves as a guide to the developers of standards for accountants when doing their job.
2.3 Ensures consistency
They ensure that no entity changes their standards, principles, basis, and methods at will. Therefore, allowing for accountability and transparency in the preparation of reports.
2.4 Acceptable by all accountantsÂ
While IFRS standards are not applicable to all countries, all accountants globally agreed with these conventions and applied them when necessary.
3. Conclusion
Accounting conventions remain the foundation in the development of standards and preparation of accounting standards. Some of them include consistency, prudency, and materiality. This norms ensured that accountants all over the world do things in similar ways.
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