Types of Financial Accounting Conventions

Types of financial accounting conventions

We may classify accounting conventions into two broad groups-those which may be said to go to the very roots of financial accounting, which we shall call 'fundamental conventions', and those which bear directly on the quality of financial accounting information, which we shall describe as 'procedural conventions'.

In our view, there are only two 'fundamental conventions' which may. be said to characterize financial accounting:

(a) the entity convention, which states that financial accounting information relates to the activities of a business entity only, and not to the activities of its owners;

(b) the money measurement convention, which limits the recognition of activities to those which can be expressed in monetary terms.

The alteration of either of these two conventions would change the entire nature of financial accounting.

There are several 'procedural conventions', which though of great importance, affect the manner in which financial accounting information is selected, analysed and communicated. Some of these conventions are the subject of criticism, for example, the realization convention which holds that a gain in value may only result from a. transaction. The following conventions are generally regarded as the most important conventions in this group:

(a) the going-concern convention

(b) the matching convention

(c) the cost convention

(d) the convention of periodicity

(e) the realization convention

(f) the convention of consistency

(g) the accrual convention

(h) the convention of conservatism.

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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... see: The Nature of Financial Accounting Conventions