4 Accounting Conventions

Convention of Disclosure – It implies that accounts should be prepared in such a way that all material information is clearly disclosed to the reader. This information should not only include figures given in the final accounts but also information which occurs after the preparation of balance sheet but before the presentation of financial statements. The idea behind this convention is that any body who wants to study the financial statements should not be prejudiced by concealing any facts. He should be able to make a free judgement.

Concept of consistency means that same accounting principles should be used for preparing

financial statements for different periods. It enables the management to draw important conclusions regarding the working of the concern over a longer period. The concept of consistency does not mean that no change should be made in accounting procedures. There should always be a scope for improvement but changes should be notified in the statements. The impact of changes
in procedures should be clearly stated. It will enable the readers to analyse information according to new procedures.

Convention of conservatism ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. If there is a possibility of loss, it should be taken into account at the earliest. On the other hand, a prospect of profit should be ignored up to the time it does not materialize. Whenever there is a choice before the Accountant, he should use it for the lower side.

Convention of Materiality events should be recorded which have a significant bearing and insignificant things should be ignored. The avoidance of insignificant things will not materially affect the records of the business. There is no formula in making a distinction between material and immaterial events. It is a matter of judgement and it is left to the accountant for taking a decision.

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Last updated on 21-07-2016 115 0

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