Conventions in accounting

The term "accounting conventions" refer to the customs or traditions, which are used as a guide in the preparation of meaningful financial records in the form of the income statement (Profit and Loss Account) and the position statement (Balance Sheet).

These are as follows.

• Conservatism: Financial statements are drawn on a conservatism basis where better evidence is required of losses. This is necessary as Management and ownership are in different hands and a cut is needed on management to show overoptimistic, favourable performance results.
• Consistency: This concept states that once the organisation has decided on a method, it should use the same method subsequently unless there is a valid reason for a change of method. If frequent changes are made it is not possible to carry out comparisons on an inter-period or interfirm basis.
• Matching: When an event affects both revenues and expenses, the effect on each period should be recognised in the same accounting period. This leads to matching concepts. The matching concepts are applied by first determining the items that constitute revenues for the period and their amounts in accordance with the conservatism concepts and than matching costs to these revenues.
• Disclosure: Apart from legal requirements all significant information should be disclosed. The matching concept states that all significant information should be disclosed and all insignificant information should be disregarded. For recording purposes also only significant events are recorded in detail taking into consideration the cost of detailed record keeping.
• Materiality: The accountant should attach importance to material details and ignore insignificant details. The question what constitutes a material detail is left to the discretion of the accountant. An item is material if there is reason to believe that knowledge of it would influence the decision of the informed investor. This has already been referred to above in connection with Disclosure. In addition to what has already been discussed, the reader is to note the following points:
  • Materiality of information
  • Materiality of amount
  • Materiality of procedure
  • Materiality of nature