What Is an Accounting Convention?

Accounting conventions are guidelines used to help companies determine how to record certain business transactions that have not yet been fully addressed by accounting standards. These procedures and principles are not legally binding but are generally accepted by accounting bodies. Basically, they are designed to promote consistency and help accountants overcome practical problems that can arise when preparing 澳洲幸运5官方开奖结果体彩网:financial statements.

Understanding an Accounting Convention

Sometimes, there is not a definitive g♏uideline in the accounting standards that govern🍰 a specific situation. In such cases, accounting conventions can be referred to.

Accounting is ꦿfull of assumptions, concepts, standards, and conventions. Concepts such as relevance, reliability, materiality, and comparability are often supported by accounting conventions that help to standardize theౠ financial reporting process.

In short, accounting conventions serve to fill in the gaps not yet addressed by accounting standards. If an oversight organization, such as the 澳洲幸运5官方开💜奖结果体彩网:Secu🐭rities and Exchange Commission (SEC) or the 澳洲幸运5官方开奖结ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ果体彩网:Financial Accounting Standards Board (FASB) sets forth a guideline that addresses the same topic as the accounting convention, the accounting convention is no longer applicable.

The scope and detail of accountꦜing standards continue to widen, meaning that 💖there are now fewer accounting conventions that can be used. Accounting conventions are not set in stone, either. Instead, they can evolve over time to reflect new ideas and opinions on the best way to record transactions.

Accounting conventions are important because they ensure that multiple companies record transactions in the same way. Historical 澳洲幸运5官方开奖结果体彩网:accounting postulates go hand in hand with accounting conventions to establish accounting standards. Providing a standardized methodology makes it easier for investors to compare the financial results of different firms, such as competing ones operating in the same sector.

That said, accounting conventions are by no means flawless. They are sometimes loosely explained, presenting companies and their 澳洲幸运5官方开奖结果体彩网:accountants with the opportunity to potentially bend or manipulate them to th♑eir advantage.

Accounting Convention Methods

There are four main♑ accounting conventions designed to assist accountants:

• 澳洲幸运5官方开奖结果体彩网:Conservatism: Playing it safe is both an 澳洲幸运5官方开奖结果体彩网:accounting principle and convention. It tells accountants to err on the side of caution when providing estimates for assets and liabilities. That means that when two values of a transaction are available, the lower one should be favored. The general concept is to factor in the worst-case scenario of a firm’s financial future.
• Consistency: A company should apply the same accounting principles across different 澳洲幸运5官方开奖结果体彩网:accounting cycles. Once it chooses a method it is urged to stick with it in the future, unless it has a good reason to do otherwise. Without this convention, investors' ability to compare and assess how the company performs from one period to the next is made much more challenging.
• 澳洲幸运5官方开奖结果体彩网:Full disclosure: Information considered potentially important and relevant must be revealed, regardless of whether it is detrimental to the company.
• Materiality: Like full disclosure, this convention urges companies to lay all their cards on the table. If an item or event is material, in other words important, it should be disclosed. The idea here is that any information that could influence the decision of a person looking at the financial statement must be included.

Areas Where Accounting Conventions Apply

Accounting conservatism may be applied to 澳洲幸运5官方开奖结果体彩网:inventory valuation. When determining the reporting value of inventory, conservatism dictates that the lower of 澳洲幸运5官方开奖结果体彩网:historical cost or replacement cost should be the monetary๊ value.

Accounting conventions also dictate that adjustments to line items should not be made for inflation or 澳洲幸运5官方开奖结果体彩网:market value. This means 澳洲幸运5官方开奖结果体彩网:book value can sometimes be less than market value. For example, if a building costs $50,000 when it is p🉐urchased, it should remain on the books at $50,000, reꦕgardless of whether it is worth more now.

Estimations such as uncollectible 澳洲幸运5官方开奖结果体彩网:accounts receivables and 澳洲幸运5官方开奖结果体彩网:casualty losses also use the conservatism convention. If a company expects to win a litigation claim, it cannot report the gain until it meets all 澳洲幸运5官方开奖结果体彩网:revenue recognition principles. However, if a litigation claim is expected to be lost, an estimated economic impact is required in the notes to the financial statements. 澳洲幸运5官方开奖结果体彩网:Contingent liabilities🗹 such as royalty payments or un🐎earned revenue are to be disclosed, too.