Study Guides/Commerce/Accounting Concepts and Conventions
Study Guide · Commerce

Accounting Concepts and Conventions Explained

To maintain uniformity, transparency, and consistency in preparing financial statements worldwide, accountants follow a set of standardized rules known as Generally Accepted Accounting Principles (GAAP). These principles are divided into two main categories: Accounting Concepts and Accounting Conventions.

Question (Click to Flip)

What is the difference between concepts and conventions?

Answer

Concepts are fundamental theoretical assumptions that must be followed strictly. Conventions are practical traditions or customs that help in resolving practical accounting problems.

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Key Facts

Accounting concepts are universally accepted and legally required.

Accounting conventions are based on custom and general agreement among accountants.

The matching concept states that expenses incurred in an accounting period must match the revenues earned during that same period.

1. Accounting Concepts

Concepts are the basic assumptions or conditions upon which the science of accounting is based.

  • Business Entity Concept: The business and its owner are treated as two separate legal entities.
  • Going Concern Concept: The assumption that the business will continue to operate indefinitely and will not liquidate in the near future.
  • Money Measurement Concept: Only transactions that can be expressed in terms of money are recorded in the books.
  • Dual Aspect Concept: Every transaction has two effects (Debit and Credit). This is the basis of the accounting equation: Assets = Liabilities + Capital.

2. Accounting Conventions

Conventions are customs or traditions that guide accountants in preparing financial statements.

  • Convention of Conservatism (Prudence): 'Anticipate no profit, but provide for all possible losses.' Always record liabilities as soon as they are probable, but only record revenues when they are certain.
  • Convention of Consistency: The same accounting policies and methods should be used year after year to allow for easy comparison.
  • Convention of Materiality: Only significant and relevant details that could influence a decision-maker should be disclosed in the financial statements.

Questions and Answers

What is the difference between concepts and conventions?+

Concepts are fundamental theoretical assumptions that must be followed strictly. Conventions are practical traditions or customs that help in resolving practical accounting problems.

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