Basic Accounting Concepts and Conventions

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Basic Accounting Concepts, Conventions, Assumptions and Principles:

Accounting concepts, conventions, assumptions and principles suggest logical and generally accepted accounting treatments and principles. These concepts are not hard and fast rules and should be used as general guidelines in applying and selecting appropriate accounting methods.

It is equally important that accounting users should have a basic understanding of the accounting concepts to comprehend financial statements. The accountants must have a through knowledge of these conventions to ensure that accounting information is presented accurately and consistently. Accounting practices should be developed in a way as are consistent with the generally accepted conventions.

Though there is no universally agreed list of fundamental accounting concepts and principles but in the following we will identify the basic accounting conventions. These are:

(1) Business entity concept of accounting

(2) Prudence concept of accounting

(3) Going concern concept of accounting

(4) Historical cost concept of accounting

(5) Consistency principle of accounting

(6) Materiality concept of accounting

(7) Matching concept of accounting

(8) Accrual concept of accounting

(9) Substance over form concept of accounting

(10) Objectivity concept of accounting

(11) Money measurement concept of accounting

(12) Revaluation of assets concept

Financial accounting as we know it today is the result of several centuries of evolution. Accounting has developed to cope with an increasingly complex business world and it has been necessary over the years to devise practical solutions to many new accounting problems. This is so as many of its procedures are have equal validity. However, the procedures in common use imply the acceptance of certain concepts or conventions which accountants now use to guide them in their work.

Accounting Concepts and Conventions – Merits and Demerits (Advantages or Disadvantages):

Merits/Advantages:

(i) Accounting concepts and conventions provide a solid foundation of accounting treatments.

(ii) They guide accountants a theoretical way of dealing with new accounting problems.

(iii) They ensure that financial accounting is developed in a logical and consistent way.

(iv) They provide a theoretical base for setting the accounting standards.

Demerits/Disadvantages:

(i) Accounting concepts and conventions guide accountants that what to do and how to do without necessarily telling them why to do.

(ii) The application of a convention relies on individual judgement so this can be used to manipulate accounting reports.

(iii) One convention may be in conflict with another. For example prudence concept requires writing off an expense immediately after it arises, whereas, matching convention may suggest spreading this cost over its entire life which may be more than one year.

(iv) Conventions simply tell us that what accountants do which may be different from what accountants ought to do.