Accounting conventions are the basic rules of accounting which have become acceptable procedures over time. They are the basic rules of accounting. Accounting standards are laws for members of the professional bodies to follow. These are the different accounting conventions and regulations, and how they ensure that the financial statements meet their users’ needs. Going concern this accounting convention is used to reinforce the assumption an accountant makes when preparing a set of accounts.
The business under consideration will remain in existence for the future. In addition to being an old concept of accounting, it is now part of UK law. Reference to it can be found in the Companies Act 1985. Without this concept, accounts would have to be drawn up on what the business is likely to be worth if it is sold piecemeal at the date of the accounts.
Such circumstances as the state of the market and the availability of finance are important considerations here. Accruals This convention is known as the matching principle. The purpose of this concept is to make sure that all revenues and costs are recorded in the appropriate statement at the appropriate time. when a profit statement is compiled, the cost of goods sold relevant to those sales should be recorded accurately and in full in that statement. Costs concerning a future period must be carried forward as a prepayment for that period and not charged in the current profit statement. For example, payments made in advance such as the prepayment of rent would be treated in this way.
Expenses paid in arrears must also be shown in the current period’s profit statement, by means of an accruals adjustment. Prudence This concept says that whenever there are alternative procedures or values, the accountant will choose the one that results in a lower profit, a lower asset value and a higher liability value. The concept is summarized by the well known phrase ‘anticipate no profit and provide for all possible losses’. Thus, undue optimism can never be part of the make up of an accountant. The danger is that if an optimistic view of profits is given then dividends may be paid out of profits that have not been earned.
The objectivity concept requires an accountant to draw up any accounts only on the basis of objective and factual information. This concept attempts to ensure that if, for example, 100 accountants were to draw up a set of accounts for one business, there would be 100 identical accounting statements prepared. Everyone would be obtaining and using only facts. The problem here is that there are many aspects of accounting ensuring that objectivity cannot be universally applicable in the preparation of accounts.
Duality Duality This is the applicable double entry book keeping system and it stems from the fact that every transaction has a double effect on the position of a business as recorded in the accounts. Similarly, when a sale is made the asset of stock is reduced as goods leave the business and the asset of cash is increased as cash comes into the business. Every financial transaction behaves in this dual way. Entity This idea here is the financial transactions of one individual or a group of individuals must be kept separate from any unrelated financial transactions of those same individuals or group.
The best example here concerns that of the sole trader. In this situation you may have the sole trader taking money by way of drawings. Money for his own personal use. Despite it being his business and apparently his money, there are still two aspects to the transaction, the business is giving money and the individual is receiving money. So, the affairs of the individuals behind a business must be kept separate from the affairs of the business itself. Cost This concept is based on the fact that only the costs paid to acquire an asset are relevant and should be the only costs to be shown in the accounts.
The accountant will rarely talk of value in this context since the use of such a term implies personal bias. After all, the value of an asset as far as I am concerned may be different to the value of the same asset as far as you may be concerned. The application of the cost concept ensures that subjective judgments play no part in the drawing up of accounting statements. Monetary Measurement The money measurement concept is one of the simpler concepts. It simply andclearly states that only those transactions that are true financial transactions may be accounted for.
That is, only those transactions that may be expressed in money values (whatever the currency) are of interest to the accountant. Materiality As far as an individual is concerned, the loss of a £10 would be important and material. As far as Chevron or Barclays Bank are concerned, the loss of £10 could be considered unimportant in many circumstances and therefore immaterial. Fraud or carelessness in the handling of money is accepted These are the basic accounting convention and the justification into why they are used.