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what is the accounting convention?
what are they?
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Answer Posted / r k jain
The term ‘convention’ is used to signify customs or
traditions as a guide to the preparation of accounting
statements. The various accounting conventions are as
follows.
·Convention of disclosure : This convention implies that
accounts must be honestly prepared and all material
information must be disclosed therein. The
term ‘disclosure’ implies that there is to be a sufficient
disclosure of information which is of material interest to
proprietors, present and potential creditors and
investors. This concept also applies to events occuring
after the balance sheet date and the date on which the
financial statements are authorised for issue, which are
likely to have a substantial influence on the earnings and
financial position of the enterprise. Their non-disclosure
would affect the ability of the users of such statements to
make proper evaluations and decisions.
·Convention of materiality : As per this convention,
financial statements should disclose all items which are
material enough to effect evaluations or decisions. The
American Accounting Association (AAA) defines ‘
materiality’ as “an item should be regarded as material if
there is reason to believe that knowledge of it would
influence the decision of informed investor”. Unimportant
items can be either left out or merged with other items.
Sometimes, items are shown as footnotes or in parentheses
according to their relative importance.
·Convention of consistency : Consistency, as used in
accounting means that persistant application of the same
accounting procedures or method by a given firm from one
time period to the next so that the financial statements of
different periods can be compared meaningfully. This
convention thus implies that in order to enable the
management to draw important and meaningful conclusions of
performance over a period or between different firms,
accounting practices should remain unchanged for a fairly
long time.
·Convention of conservatism : According to this
convention, the accountant should be conservative in
his/her approach in his estimated, opinions and selection
of procedure. In accounting, conservatism refers to the
early recognition of unfavourable events.For instance, all
possible and expected losses must be provided for.But on
the other hand, gains and other financial benefits should
not be provided for unless they are realised. In other
words, ‘anticipate no profit and provide for all possible
losses’.
Regards
R K Jain
find_priya2001@yahoo.co.in
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