In this Article, we will be learning about Accounting Conventions with Examples in the most simple and effective way. These conventions take into account comparison, relevance, full disclosure of transactions, and application in financial statements when standardizing the financial reporting process.
Table of Contents
Accounting Conventions with Examples
Conservatism
Accounting Conventions with Examples: When preparing financial statements, the accountant must adhere to the conservatism principle of “playing it safe,” taking into account all possible loss scenarios when recording transactions. While logging assets, two values appeared: Market value and Book value. In general, the lower value is used because these conventions consider the worst-case scenario. There are specific points that can be made in order to criticize such a principle.
Consistency
Accounting Conventions with Examples: Once the business has decided on a method for reporting, it should be followed consistently for the next few years. This principle aids investors and analysts in reading, comprehending, and comparing a company’s financial statements. If a company wants to change its method, it should do so only when there are good reasons to do so.
Full Disclosure
Accounting Conventions with Examples: Even after applying the accounting convention, relevant and important information about the company’s financial situation must be disclosed in financial statements. Contingent Liabilities and Law Suits against a company, for example, should be reported in the company’s financial statements as notes.
Materiality
Accounting Conventions with Examples: The impact of an event or item, as well as its relevance in financial statements, are included in the materiality concept. All events and items that might influence the decision of investors or analysts must be reported by the accountant. The information, on the other hand, should be worthy of investigation and have a higher value than the cost of preparing statements.
Importance of Accounting Conventions with Examples
Accounting Conventions with Examples: are a set of guidelines for complex and ambiguous business transactions. While not mandatory or legally binding, these generally accepted principles ensure that financial statements are consistent.
- Monetary Impact: Accounting only considers items and events that have monetary value. Accounting does not take into account items such as market leadership, management efficiency, and skills because they do not directly reflect the financial impact on business.
- Different Entity: Accounting convention ensures that private transactions of owners do not interfere with business transactions. Because businesses and owners are legally treated as separate legal entities, this should be followed in business as well.
- Realization: Conventional wisdom focuses on the completed transaction. The transfer of ownership or sale of an asset or product should be considered after the entire process is completed, not at the time of contract.
- Understanding: Information in financial statements should be clear in such a way that investors or analysts who read them can understand it.
- Comparison: Many investors and analysts compare a company’s financial statements to those of its peers in order to analyse performance over time. They ensure that any information reported is presented in an easy-to-understand format for investors.
- Reliable: They ensure that reliable information is separated and reported in financial statements.
- Neutral: They state that the accountant should make financial statements without a vested interest in the company or a biased opinion.
Conclusion
Accounting Conventions with Examples: are intended to provide guidelines for resolving issues with specific transactions that are not adequately addressed by accounting standards. These conventions assist many businesses in efficiently reporting their financial data. Simultaneously, it ensures that financial statements contain all relevant information for the benefit of investors.
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