Accounting Concepts & Accounting Conventions

Accounting is the system a company uses to measure its financial performance by noting and classifying all the transactions like sales, purchases, assets, and liabilities in a manner that adheres to certain accepted standard formats. It helps to evaluate a Company’s past performance, present condition, and future prospects. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.

To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. Accounting concepts and conventions as used in accountancy are the rules and guidelines by that the accountant lives.   All formal accounting statements should be created, preserved and presented according to the concepts and conventions that follow.

Accounting concepts

 Definition:-   

Ground rules of accounting that are (or should be) followed in preparation of all accounts and financial statements. Its Objective is to maintain uniformity and consistency in accounting records. Following are the various accounting concepts that have been discussed in the following sections :

1. Business entity concept: -  for accounting purposes, the business enterprise

         and its owners are two separate independent entities.

2.  Money measurement concept   -    This concept assumes that all business transactions must be in terms of  money, that is in the currency of a country
3. Going concern concept - This concept states that a business firm will continue to carry on its activities for an indefinite period of time   .
4.  Accounting period concept     All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period
5. Accounting cost concept  -Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price.
6.  Duality aspect concept  The implication of dual aspect concept is that every transaction has an equal impact on assets and liabilities in such a way that  total assets are always equal to total liabilities
7.  Realisation concept -    This concept states that revenue from any business transaction should be included in the accounting records only when it is realised.
8. Matching concept  The matching concept states that the revenue and the expenses incurred to  earn the revenues must belong to the same accounting period.

 Accounting Convention

Guidelines that arise from the practical application of accounting principles. An accounting convention is not a legally-binding practice; rather, it is a generally-accepted convention based on customs, and is designed to help accountants overcome practical problems that arise out of the preparation of financial statements. As customs change, so to will accounting conventions. Conventions are the customs and traditions that act as a guide to the preparation of the financial statements. Following these conventions leads to clear and meaningful financial statements. The conventions followed to prepare accounting statements are the:

• Convention of Full Disclosure - accounts should make a full disclosure of all monetary or financial information that can impact decision making of different parties
• Convention of  Materiality  - only those transactions should be considered which have material impact on the profitability or the financial status of the organization.
• Convention of Consistency - The convention of consistency specifies that the accounting practices and methods used by an organization should remain consistent over the years
• Convention of Conservatism  -   This principle considers all prospective losses and ignores all perspective gains. It is defined as a guideline that chooses between acceptable accounting alternatives for recording events or transactions so that the least favorable immediate effect on assets, income and owners equity is reported in the accounting period.

Conclusions

These, then, are the basic concepts and conventions on which the accountant bases all of his accounting work.   .   The concepts and conventions also apply to the millions of businesses world wide that do not publish their accounts.