Accounting Convention Definition & Example
Accounting Convention Definition – It refers to the accounting guidelines that guides the accountant for recording the financial transactions.
They are also similar to accounting concepts. They provides the important guidelines or standards for recording the transaction. The main purpose of evolution of accounting convention is to bring about the uniformity or consistency in the preparation of important financial statements such as Balance Sheet, Income Statement and Cash Flow Statement.
One can say that these are the laws of accounting that each and every accountant has to follow while preparing the books of accounts. The example of accounting convention are given below –
Accounting Convention Example
In order to get the clear picture of accounting convention definition, let’s discuss various accounting conventions.
Convention of Full Disclosure – This convention of accounting states that the books of accounts should be prepare honestly and there must be utmost transparency. In addition to this, it also states that business should disclose all the information.
Consistency Convention – According to this convention, the practices and method of accounting should be consistent year after year. That is there should be any change in the method of accounting. Then only managers can compare the performance of business with one company to another or with one year to another.
Conservatism – This statement states that business should provide for anticipate losses and ignore anticipate profits. As per this convention only, the closing stock is valued at market price or cost whichever is lower.
Convention of Materiality – This convention states that insignificant items or events should be ignored while recording in the books of account. Material refers to those items which could effect the decision of an investor.