The Nature of Financial Accounting Conventions

The nature of financial accounting conventions

Textbooks refer variously to accounting principles, accounting postulates, accounting concepts, accounting imperatives and accounting assumptions to describe those basic points of agreement on which financial accounting theory and practice are founded. We prefer to use the term 'accounting conventions' to stress that the ground rules of financial accounting are not the subject of immutable law, but are based on consensus. Conventions define the assumptions on which the financial accounts of a business are prepared. Financial transactions are interpreted in the light of the conventions which govern accounting methods. In effect, the conventions of financial accounting largely determine the interpretations given in financial reports of the events and results which they portray. For example, the conventions relating to the recognition of revenue determine the dimension of the income which will be reported to shareholders and the value of the enterprise as judged from the balance sheet.

If accountants as a group wish to change some of their conventions, they are free to do so. Indeed, accounting bodies in Britain and in the United States are engaged in the review of their conventions and practices, and for this purpose, the Financial Accounting Standards Board was established in the United States in 2003 (replacing the Accounting Principles Board) and in the United Kingdom the Accounting Standards Committee was established in 2000 with similar objectives.

The term 'accounting conventions' serves in another sense to underline the freedom which accountants have enjoyed in determining their own rules. There is no tradition of State interference in the USA and UK, for example, as regards the practice of accounting. Such laws as are to be found are contained in statutes dealing with the activities of corporate bodies, such as the Companies Acts, which specify the nature of the accounting information that must be disclosed to shareholders, and the Income Tax and Corporation Tax Acts, which impose a duty on business firms to submit accounting information for the purpose of assessing the liability to tax. So far, neither Parliament nor the Courts have issued directives to the accounting profession as regards the conventions which they should observe. In France, by contrast, there is a different political tradition, and there is legislation dealing with accounting practices and they are detailed in the Plan Compatible, which is an edict issued by the French Government detailing the manner in which accounting statements should be prepared.

Financial accounting conventions act as filters in selecting data as input into the processing system and as output of information for users.

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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... see: Financial Accounting Conventions