Basic accounting conventions are principles and guidelines that guide the preparation and presentation of financial statements.
• These conventions help maintain consistency, reliability, and transparency in financial reporting.
The important accounting conventions are mentioned below:
- Consistency
- Conservatism
- Materiality
- Full disclosure
Consistency:
The consistency convention suggests that once an accounting method or principle is adopted, it should be consistently applied over time. It means the accounting method should not be changed from period to period.
• Consistency enhances comparability between financial statements of different periods, allowing users to better analyze trends and changes.
• Changing accounting methods frequently can lead to confusion and may hinder the ability to assess the entity’s financial performance accurately.
Example: If a company chooses the straight-line method for depreciating its assets, it should continue using this method in subsequent periods unless there is a justifiable reason for a change.
Conservatism:
Conservatism suggests that if more than one accounting method is equally defensible, the one resulting in the least immediately favorable impact on the financial statement should be used.
• This means losses that are probable but have not yet occurred are recognized, but gains that are probable are not recognized until they have occurred.
Materiality:
Materiality is a convention that states only significant or material information should be included in financial report.
• This convention recognizes the practicality of focusing on material items to avoid unnecessary detail.
Full disclosure:
The full disclosure convention requires entities to provide all necessary information in the financial statements to ensure that users have a complete understanding of the financial position and performance.
• This includes details about accounting policies, contingencies, and other relevant information. Full disclosure enhances transparency and helps users make well-informed decisions.
