Financial Accounting Conventions

Financial accounting conventions

The conventions of financial accounting are particularly significant to the development of accounting theory in two ways. First, they are themselves part of an empirical process for developing rules of financial accounting. In this sense, they may be regarded as belonging to the corpus of accounting theory. Second, they reflect the influence of the institutional forces which shape the philosophy of accounting in a given economic and social environment. Thus, the accounting profession in the United Kingdom and in the United States is a powerful influence in shaping the development of accounting within the context of the problems found in those countries.

The conventions of accounting may be seen as related to the general problem of developing viable theories of financial accounting. As we shall see, their origin lies in a historical process of development. The on-going nature of this process is discussed elsewhere, where the review of the conventions of financial accounting by the accounting profession is seen to focus on the formulation of standard accounting practices.

We mentioned in the Introduction to this part that the nature of financial accounting information is dictated not by the needs of external users, but rather was determined to a considerable extent by the conventions existing among accountants for identifying, evaluating and communicating financial information.

Here, we analyse the nature and the effects of accounting conventions on the manner in which accountants generate financial information. The need for these conventions is discussed, as well as the problems which they pose. We conclude with a discussion of the need for financial accounting standards to reduce the diversity of accounting practices which are permitted under existing conventions.

In effect, the conventions and standards reflect and explain the systems of thought which determine accounting practice, and which form the basic concepts of the descriptive theory of financial accounting to which this part is addressed.


Interested in Valuation Concepts

Read on: Problems and Assumptions

Problems and Assumptions

A basic assumption underlying communication theory is that there is a clear separation between the transmitter and the receiver of information. This is acknowledged also in financial reporting as regards the distinction which is drawn between the function of the accountant as the transmitter of information and the external user as the receiver of information. The external user relies upon the accountant to provide him with a significant supply of information for making economic decisions. It is for each user to evaluate and interpret this information in the course of... see: Problems and Assumptions