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what are concepts and conventions of accounting
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Answer Posted / sunita
Accounting Conventions
The most commonly encountered convention is the "historical
cost convention". This requires transactions to be recorded
at the price ruling at the time, and for assets to be valued
at their original cost.
Under the "historical cost convention", therefore, no
account is taken of changing prices in the economy.
The other conventions you will encounter in a set of
accounts can be summarised as follows:
Monetary measurement
Accountants do not account for items unless they can be
quantified in monetary terms. Items that are not accounted
for (unless someone is prepared to pay something for them)
include things like workforce skill, morale, market
leadership, brand recognition, quality of management etc.
Separate Entity
This convention seeks to ensure that private transactions
and matters relating to the owners of a business are
segregated from transactions that relate to the business.
Realisation
With this convention, accounts recognise transactions (and
any profits arising from them) at the point of sale or
transfer of legal ownership - rather than just when cash
actually changes hands. For example, a company that makes a
sale to a customer can recognise that sale when the
transaction is legal - at the point of contract. The actual
payment due from the customer may not arise until several
weeks (or months) later - if the customer has been granted
some credit terms.
Materiality An important convention. As we can see from the
application of accounting standards and accounting policies,
the preparation of accounts involves a high degree of
judgement. Where decisions are required about the
appropriateness of a particular accounting judgement, the
"materiality" convention suggests that this should only be
an issue if the judgement is "significant" or "material" to
a user of the accounts. The concept of "materiality" is an
important issue for auditors of financial accounts.
Accounting Concepts
Four important accounting concepts underpin the preparation
of any set of accounts:
Going Concern Accountants assume, unless there is evidence
to the contrary, that a company is not going broke. This has
important implications for the valuation of assets and
liabilities.
Consistency Transactions and valuation methods are treated
the same way from year to year, or period to period. Users
of accounts can, therefore, make more meaningful comparisons
of financial performance from year to year. Where accounting
policies are changed, companies are required to disclose
this fact and explain the impact of any change.
Prudence Profits are not recognised until a sale has been
completed. In addition, a cautious view is taken for future
problems and costs of the business (the are "provided for"
in the accounts" as soon as their is a reasonable chance
that such costs will be incurred in the future.
Matching (or "Accruals") Income should be properly
"matched" with the expenses of a given accounting period.
Key Characteristics of Accounting Information
There is general agreement that, before it can be regarded
as useful in satisfying the needs of various user groups,
accounting information should satisfy the following criteria:
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