Accounting is a critical aspect of any business, and it’s essential to have a clear understanding of its basic concepts and conventions. However, many people often confuse accounting concepts with conventions, leading to incorrect financial reporting.
Accounting concept refers to the basic principles underlying financial accounting. While accounting convention refers to the common practices and traditions followed by accountants in recording and reporting financial transactions.
Accounting Concepts vs. Conventions
| Accounting Concept | Accounting Convention |
|---|---|
| Accounting concept refers to the basic principles underlying financial accounting, which provide a theoretical and conceptual basis for financial reporting. | Accounting convention refers to the common practices and traditions followed by accountants in recording and reporting financial transactions, which are based on practical and traditional considerations. |
| The purpose of accounting concepts is to ensure consistency, accuracy, and relevance of financial information in financial reporting. | The purpose of accounting conventions is to simplify accounting procedures and facilitate the preparation of financial statements. |
| Examples of accounting concepts include entity concept, matching concept, accrual concept, and going concern concept. | Examples of accounting conventions include historical cost convention, materiality convention, consistency convention, and conservatism convention. |
| They are based on a theoretical and conceptual basis. | They are based on a practical and traditional basis. |
| Accounting concepts are essential for understanding the nature and purpose of financial accounting, and for ensuring the reliability and comparability of financial information. | Accounting conventions are necessary for ensuring the reliability and comparability of financial information, and for maintaining consistency in accounting practices. |
| They are widely accepted accounting principles and standards that are used in the preparation of financial statements and reports. | They are generally accepted accounting practices and customs that are applied in the day-to-day accounting operations of businesses and organizations. |
| Accounting concepts are less flexible, as they are based on fundamental accounting principles that are less subject to change. | Accounting conventions are more flexible, as they can be modified or updated to reflect changing business practices and conditions. |
| They are applied in the preparation of financial statements and reports. | They are applied in the day-to-day accounting operations of businesses and organizations, and in the preparation of financial statements and reports. |
Introduction to accounting concepts and conventions
Accounting concepts are broad ideas that provide a framework for financial reporting. They include concepts like the going concern principle, which states that a business should be assumed to continue operating into the future.
Other accounting concepts include the matching principle ( revenues should be matched with expenses in the period they are incurred) and the accrual basis of accounting (recording transactions when they occur, regardless of when cash changes hands).
Conventions, on the other hand, are more specific guidelines for financial reporting. They include things like the historical cost convention ( valuing assets at their original purchase price) and full disclosure (providing all relevant information that could impact a reader’s understanding of the financial statements).
Similarities between accounting concepts and conventions
- Both accounting concepts and conventions are used in financial accounting to guide the preparation and presentation of financial statements and reports.
- Both accounting concepts and conventions are necessary for ensuring the accuracy, consistency, and relevance of financial information.
- Both accounting concepts and conventions are based on generally accepted principles and practices in the accounting profession.
- Both accounting concepts and conventions help to ensure that financial information is understandable and comparable across different businesses and industries.
- Both accounting concepts and conventions are subject to change over time as accounting standards and practices evolve.
Examples of accounting concepts and conventions
1. Going Concern: This accounting concept assumes that an entity will continue to operate indefinitely into the future. This concept is important in financial reporting as it provides a basis for valuing assets and liabilities.
2. Accruals: This accounting convention requires that revenues and expenses are recognized in the period in which they are earned or incurred, regardless of when cash is actually received or paid. This convention is important in financial reporting as it provides a more accurate picture of an entity’s financial performance.
3. Matching: This accounting convention requires that expenses be matched with revenues in the period in which they are incurred. This convention is important in financial reporting as it ensures that expenses are not overstated or understated in relation to revenues.
4. Conservatism: This accounting principle dictates that when there is uncertainty surrounding the recognition of assets and liabilities, accountants should err on the side of caution by recognizing them only when there is a high degree of certainty. This principle is important in financial reporting as it helps to prevent asset values from being overstated and liability values from being understated.
Benefits of understanding the difference between accounting concepts and conventions
It can help you better understand the financial statements of others, and make more informed decisions when dealing with financial matters.
It can help you avoid making common mistakes when preparing financial statements.
Additionally, understanding this can help you communicate more effectively with your accountant or other financial professionals.
By having a clear understanding of the terms, you can be sure that everyone is on the same page and working towards the same goal.
This can save time and frustration, and help ensure that your financial affairs are handled in the best way possible.
Key differences between Accounting Concepts and Conventions
- Accounting Concepts: The basic accounting concepts are those which provide guidance in the recording of transactions and preparation of financial statements. These concepts include the following:
- Accruals concept: This concept states that income and expenses should be recorded in the period in which they are earned or incurred, regardless of when they are actually received or paid. This provides a more accurate picture of a company’s financial position.
- Matching concept: This concept dictates that expenses should be matched with revenues in the same period, so as to better show the profitability of a company.
- Relevance: This concept requires that information included in financial statements is relevant to the users needs. This means that only information which is important should be included, and any information which is not relevant should be excluded.
- Reliability: In order for information to be considered reliable, it must be free from material error and bias. It should also be verifiable and objective.
- Timeliness: Financial statements must be prepared and released in a timely manner so that users can make informed decisions.
Acconting Conventions:
- Practical considerations and traditions: Accounting conventions are based on practical considerations and traditions.
- Flexiblity: Accounting conventions are more flexible than accounting concepts and can be modified to reflect changes in business practices and conditions.
- Acceptance: Accounting conventions are not universally accepted.
- Uses: Accounting conventions are used to simplify accounting procedures and facilitate the preparation of financial statements.
- Change over time: Accounting conventions are subject to change over time as business practices and conditions evolve.
- Difference between margin and markup
- Difference between normal and abnormal loss
- Difference between public and private sector banks
Conclusion
Accounting concepts help to guide the process of recording transactions, accounting conventions are established guidelines that must be followed when carrying out financial reporting. Understanding this distinction is essential in order to accurately record financial information and ensure that it adheres to best practices. With an understanding of these differences, you can begin to apply both concepts into practice and ensure accuracy in your reports.
