Accounting convention

Accounting convention refers to principles/guidelines generally accepted in areas where clear guidelines are not available via accounting standards.

So, an accounting convention is followed to record such transactions in the accounting system. It’s important to note that following these guidelines is not a legal requirement but a general expectation of the stakeholders. Hence, it should be followed to ensure stakeholder’s expectations from business is satisfied.

Why the use of accounting conventions is important?

It helps ensure companies across the board follow similar accounting treatment for situations where clear guidelines are not available. It seeks to enhance the comparability of the financial statement in terms of decision-making. Hence, it’s important to use accounting conventions in the right way.

Types of accounting convention

The following four are considered essential conventions used in accounting.

1. Consistency – The business needs to ensure consistency in opting for significant accounting policies, assumptions, estimates, and other metrics. This convention helps ensure financial information from different accounting periods can be compared in order to identify trends and series analyses. Hence, consistency is an essential accounting convention. However, accounting policies and assumptions can be changed. So, the change should be aligned to enhance financial reporting credibility.  
2. Full disclosure– The business is required to fully disclose financial and operational information fundamental to user understanding. The purpose of fully disclosing relevant information is to enhance the transparency and credibility of the financial information presented in the business financial statement.
3. Materiality– The business must disclose all the material events/information in the financial statement. For this purpose, all events are material that impact the decisions of financial statement users. So, all such events must be disclosed in the business financial statement.
4. Conservatism/prudence– It’s an accounting convention in addition to accounting principles. As per this concept, the business needs to ensure it remains optimistic in terms of recording liability/expenses but pessimistic when recording revenue/asset. The liability/expenses can be recorded based on probability but assets should only be recorded when business is certain to realize economic benefits in the future.

Difference between accounting convention and accounting principles

Accounting principles are relatively rigid and professionally designed accounting guidelines to enhance reliability of financial information. For instance, the accrual concept, substance over form, and monetary units are accounting principles. On the other hand, accounting convention is an expected norm that’s reasonably expected from the business. For instance, stakeholders expect fundamental and relevant information regarding important business events.

Conclusion

Accounting convention refers to adopting principles/guidelines generally expected from the business. These are conventional or accepted principles where accounting standards do not provide clear concepts/treatments.

Consistency, full disclosure, materiality, and conservatism are considered essential accounting conventions.

On the other hand, accounting principles are relatively rigid concepts designed to enhance the credibility of financial reporting and accounting records.