Accounting conventions are generally accepted guidelines that help accountants prepare financial statements in a clear, reliable, and comparable manner.
These conventions are based on long-established customs and practices rather than rigid rules, and they aim to ensure that financial information is presented fairly and meaningfully to users.
Accounting conventions enhance the usefulness of financial statements by promoting uniformity, transparency, and prudence in reporting.
Accounting Conventions: The Guidelines
Conservatism (Prudence)
This convention follows a cautious approach to accounting. All anticipated losses are recognised as soon as they are foreseen, while anticipated gains are recorded only when they are actually realised. This prevents overstatement of profits and assets and ensures a realistic presentation of financial position.
Consistency
Under this convention, a business is expected to use the same accounting methods and practices from one accounting period to another. For example, if a particular method of depreciation is adopted, it should be followed consistently so that financial results can be compared over time.
Materiality
The materiality convention states that only information that is significant enough to influence decision-making needs detailed accounting treatment. Items of negligible value are treated in a simpler manner. For instance, low-cost assets are charged as expenses immediately rather than being capitalised and depreciated.
Full Disclosure
This convention requires that all material and relevant information relating to the financial performance and position of a business must be disclosed in the financial statements or their accompanying notes. This includes details such as contingent liabilities, pending legal cases, or major changes in management.
