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TABLE OF CONTENTS
- Accounting Concepts
- Accounting Conventions
- The Relevance of Accounting Concepts and Conventions
- Difference Between Accounting Concept and Accounting Convention
- Conclusion
- FAQs
Accounting Concepts
Accounting concepts are the fundamental ideas, conditions, and assumptions that underpin the accounting process. Moreover, they provide a framework for recording, reporting, and interpreting financial information and transactions. Concepts are integral since they ensure that financial statements are prepared uniformly and consistently, making them more useful and reliable for decision-making.
Stakeholders and businesses need these concepts to monitor their financial performance, comply with financial reporting requirements, and make informed decisions. Investors, stakeholders, creditors, and government agencies use accounting concepts to gauge the financial health of any business.
Important Accounting Concepts
For accountants, it’s important to understand these concepts to ensure adherence to all the necessary procedures and that all information is accurate and consistent. The following are some of the types of accounting concepts to adhere to:
- Going concern concept
- Business entity concept
- Accounting period concept
- Money measurement concept
- Revenue recognition principle
- Accounting accrual basis
- Matching principle
- Duality concept
- Full disclosure principle
- Historical cost concept
- Materiality concept
- Fair value
- Cost principle
- Substance over form
- Fair value
- Consistency
Accounting Conventions
Accounting conventions are a set of guidelines to help organizations decide how to monitor a particular business transaction or transactions, which are not thoroughly addressed by accounting standards. Although the guidelines are not legally binding, they are accepted by most accounting bodies as a way of conveying the same meaning to others.
Essentially, they’re crafted to encourage uniformity and helps accountants resolve real-time problems that could occur when compiling financial accounts. Accounting practices develop new conventions as new financial products, changes, and problems that could arise.
Major Accounting Conventions
Again, accounting conventions are not mandatory or legally binding, but they help in understanding complicated or unclear business transactions. At the end of the day, they help maintain consistency in financial statements. The major conventions are the following:
- Consistency
- Conservatism
- Full disclosure
- Full disclosure
The Relevance of Accounting Concepts and Conventions
Accounting concepts and conventions express the restrictions and limitations within which accounting transactions function. Simply put, they are the generally accepted principles that create the fundamental base for consistent financial statement preparation.
Importance of Accounting Concepts and the Benefits
When implemented effectively, accounting concepts encourage business organizations to incorporate and interpret financial transactions into meaningful processes. For accountants and business owners, it’s always important to clearly understand the basic concepts to integrate consistency and uniformity within the business accounting process.
Accounting Concepts—the Benefits
- Helps record financial transactions at each step to ensure a more organized, planned, and clear business model.
- Provides financial information to investors as well as expresses the company’s financial status and indicates a pure understanding of how each transaction has been recorded.
- Provides verified and detailed financial data about the assets and liabilities of an organization.
- Provides financial business report that’s commonly accepted across the globe and supports better understanding of the company’s financial information.
Importance of Accounting Conventions and the Benefits
Often, accounting conventions form the foundation for accounting standards or the GAAP (Generally Accepted Accounting Principles) in a specific jurisdiction. Typically, these standards are more specific and detailed, providing guidelines on applying conventions in different scenarios.
Accounting Conventions—the Benefits
- Provide consistency for financial reporting, which makes it easier for investors, stakeholders, creditors, and debtors to understand and compare financial statements later on.
- Incorporate historical cost that can provide a more accurate picture of the financial health of a business organization.
- Streamlines the complex financial business reality into standardized, manageable categories, which make it easily understandable by non-experts.
- Legal compliance, which means that they are legally required, ensures that organizations follow a consistent process of financial reporting.
Difference Between Accounting Concept and Accounting Convention
Both help craft a universal process of recording financial data and information. However, they differ in their focus and who enforces them. Let’s find out some of the differences between the two.
- Bias
Accounting concepts are universal and lack a chance for bias. However, there’s a big possibility of bias with accounting conventions. This is because various practices set accounting conventions and could use their judgments and beliefs when making these.
- Follow-through
Since accounting conventions are theoretical, they’re less restrictive and are not always adhered to by every company. Accounting concepts, on the other hand, are traditional procedures that accountants should follow, providing a true and fair insight into the financial statement.
- Priorities
Accountants use concepts when working on account maintenance. Conventions are used when preparing a financial statement towards the end of the accounting cycle.
- Uniform Adaptation
Different organizations agree to adapt accounting concepts uniformly. Accounting conventions are not universally adapted, and differ from one company to another.
- Legal Recognition
Concepts are legally recognized by accountants while conventions are not formally recognized. Accounting concepts fall under the GAAP, and are accounting standards adopted by the SEC of the United States.
Conclusion
Analyzing the aspects of accounting concepts and accounting conventions is important for business organizations. Even though concepts and conventions vary, their implementation in the preparation of the financial statements is vital for the betterment of an organization.
As the business world continues to change, accounting concepts and conventions would inevitably progress hand in hand with it. However, until such time, they would continue to be an integral aspect in preparing financial statements.
FAQs
1. What is the basic accounting concept?
The basic accounting concept is to record, summarize, and report financial transactions to provide reliable and accurate financial information for a well-informed decision-making process.
2. What’s the importance of using accounting concepts?
The importance lies in ensuring comparability, consistency, relevance, and reliability of financial information.
3. Which accounting convention method is better?
All convention methods have their applicability. It depends on the kind of business what methods are most beneficial to them.
4. How do accounting concepts help business management?
They provide tallied and explained financial information about the asset and liabilities of an organization.
5. Are accounting conventions mandatory?
No, but they’re generally accepted practices and are used as guidelines for recording business transactions.
