Accounting Conventions

Consistency Principle

A business should use the same accounting methods and procedures from period to period. Any changes must be disclosed to users.

Entity Convention

Accountants consider a business to be separate and distinct from the owner (personal finances recorded separately)

Duality Concept

All transactions have two impacts on the accounting equation, ensuring that the equation remains balanced.

Monetary Convention

An entity's transactions are recorded in the accounts in the monetary unit of the country in which it is operating.

Historical Cost Convention

Assumes that business transactions are recorded in terms of their cost at the time the transaction occurred.

Going Concern Convention

Assumes that the business is going to continue its operations indefinitely and is not likely to be liquidated in the forseeable future.

Prudence Convention

Caution should be exercised when making accounting judgements. Don't overstate assets. Don't understate liabilities.

Limitation of Monetary Convention

Certain transactions/activities/events may not have an obvious money value

Going Concern AKA

Continuity Convention

Faithful Representation

Information that is complete, neutral (without bias), and free from material error

Limitation of Prudence Convention

May lead to lower value of assets being used and the liabilities being overstated, as a consequence profit may be understated.

Monetary Convention Reason

Money is used as an objective means of comparison and evaluation

Consistency Convention

Once a particular method of accounting is selected, it should be applied consistently over time.

Historical Cost Reasoning

Provides objective verifiable evidence of a transaction rather than a subjective opinion liable to distortion.

Accounting Period Convention

Reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results

Limitation of Historical Cost Convention

The balance sheet does not reflect the market value of assets, rather their cost. Thus balance sheets may not reflect true value, for example, long-held assets (Land & Buildings).

Entity Convention

The records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.

Materiality

The size or significance of financial information, determined by considering whether omitting it or misstating it from the reports could influence decisions that users make