What Are Accounting Concepts and Accounting Conventions?
All businesses need to rely on accounting to record their business transactions and generate financial statements. Business owners (Also see Tricks From Millionaire Business Owners) may make use of those statements to analyse their financial position, and this enables them to plan for their business and remedy any problems by making necessary adjustments. Also, the investors and stakeholders get to know the performance and profitability of the business by looking at the financial statements so that they can make decisions based on the information disclosed.
As accounting is so crucial, have you ever wondered how the accountants in an accounting firm in Singapore record business transactions? What are the rules they follow, and how do the concepts help them? If you wish to keep a tight grip on the financial position of your business (Also see Applying the Accounting Equation in Various Businesses), you need to have some basic knowledge in accounting too. Now, let us have a look at the accounting concepts and accounting conventions.
Accounting concepts act as a basis when one is preparing the financial statements of a company. These concepts form a basis in the formulation of accounting methods, principles and procedures one would use when recording and presenting the financial transactions that a company has carried out. The accounting concepts help in providing rational approaches and integrated structures to the accounting procedures. The accountants would interpret all the business transactions that happen by using the accounting concepts, and this leads the way to the accounting methods.
There are a lot of accounting concepts that the accountants (Also see Why Do the Accountants Close the Books?) would use in recording business transactions. Some of the examples are as below:
– Accrual concept
This concept states that one should recognise the revenue once the amount had become receivable, and recognise an expense when it turned out to be due for payment.
– Cost concept
According to this concept, one can only record the assets of a company based on their respective purchase price.
– Going Concern Concept
The assumption that this concept makes is that a company will continue operating for an unlimited period.
– Matching Concept
This concept states that the revenue and expenses for an accounting period should match with each other.
On the other hand, accounting conventions are the practices that a company has adopted throughout a specific period. They depend on the general agreement that the accounting bodies have made. Besides, accounting convention can be very helpful to the accountant when they are preparing the financial statements.
The accountancy bodies may make changes or modifications on any accounting convention to improve the quality of financial information. Some of the basic ones are as follows:
– Conservatism
Based on this convention, a company should not assume that it will earn any gains and incomes. However, it needs to make adequate preparation for all kinds of losses and expenses.
– Consistency
This convention states that one can only compare financial statements when the company follows the accounting policies consistently over a period. It can only make the necessary changes under special circumstances.
– Disclosure
According to this convention, a company should prepare the financial statements in a way that it discloses the material information to the readers so that they can make rational decisions.
– Materiality
The materiality concept is the only exception to the disclosure convention. It states that one should only disclose the items that bring notable economic effect in the financial statements (Also see 4 Alerting Indications on Your Financial Statements).