The customs and ethics that help the accountants at the time of conversing about the accounting report are covered under the term known as Accounting Conventions.
In order to walk in a consistent manner in the bookkeeping process (accounting), conventions were developed and advanced. Conventions are not the written documents; they are the laws that are unwritten. The accounting conventions are the traditions that the accountants adopt, that serves the purpose of a guide that helps in the preparation of accounting reports.
Following are some of the important accounting conventions, currently in use:
- Convention of Disclosure
The convention of disclosure says that the accounting statements should be prepared with full fairness and all the related private and important data should be revealed within it. the concentration should be on the material information and not the immaterial. The primary reason for this convention is to contact all material and related evidences of the financial performance, that have material interests to the investors.
- Convention of Consistency
The rules and regulations of the accounting cycle should be observed and checked regularly. For the management of the organization to come up to the conclusions, it is important for the company to practice the methods of accounting from one period to another. By using this type of conventions, there are high chances in the increase in the level of the accuracy, and comparability. This further, helps in the correct decision making in the company.
- Convention of Conservatism
The main essence of this convention is “anticipate no profit and provide for all possible losses”. Nobody knows about the future situations. Conservatism refers to the selection of suitable approach that further leads to irony against the overstatement of the resources and the earnings. If some error occurs in case of understatement, there are no serious issues for that, but on the other hand, there may occur serious consequences in the case of overstatement. This convention is very important at the time of preparing the financial reports.
- Convention of materiality
American Accounting Association defines the term materiality as “An item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor”. The amount and the nature of the item are considered the basis on which the materiality depends. Accountants should make sure that all the elements are reported in a proper manner in any financial statement. All the items of the business whether small or large should be considered alike. The materiality convention indicates that the accounting treatment of some particular item shall be affected by its economic growth to some extent. Materiality in itself has some relative importance. The convention of materiality allows the accountants to ignore all the other accounting codes.