Accounting concepts and accounting conventions both are set of guidelines and procedures for preparing financial statements and aim improve the true and fair view of financial statements. Both are accepted and recognized all over the world for preparing financial statements. Although these two are very similar to each other but there are some differences between them
This article aims to define accounting concepts and accounting conventions and then identifying the differences between the two.
Definitions and explanations
Accounting concepts are the basic principles that ensure that all the financial information presented in financial statements provides true and fair view of the financial performance and position of the business entity. When preparing financial statements, all the accounting concepts need to be followed because these provide basis of measurement for elements of financial statements. Accounting concepts include separate entity concept, accruals concept, prudence concept, money measurement concept, dual aspect concept, matching concept, and going concern concept.
- Separate entity concept: Each business is a separate economic entity from its owners.
- Accruals concept: Incomes and expenses should be accounted for in the period to which they relate irrespective of the period in which they are received or paid.
- Money measurement concept: All the items to which monetary value can be attributed should be recorded in financial accounts.
- Matching concept: Incomes and expenses incurred to earn that income should be charged to income statement in the same period.
- Dual aspect concept: Each business transaction has two aspects known as debit and credit.
- Going concern concept: Business should disclose that it will continue its trade in near future as it was in past and there is no need or plan to reduce the operations of the business.
Accounting conventions are the past practices that are generally accepted and adopted in preparing financial statements. All these practices have developed over the time and are applied in preparation of financial accounts but are not formally written or advised by the accountants for preparation of financial statements. There are four main accounting conventions known as consistency, materiality, prudence and full disclosures.
- Consistency means that similar items of financial statements should be treated in similar way in one accounting period and same accounting treatment should be used over the period.
- Materiality means that all the material items should be recorded in financial statements however non material items can be ignores.
- Prudence requires a measure of caution when measuring elements of financial statements so that assets and incomes are not overstated and expenses and liabilities are not understated.
- Full disclosure means that all the relevant information of the business should be disclosed whether it is favorable or unfavorable for the entity.
Difference between accounting concepts and accounting conventions
The main points of difference between accounting concepts and accounting conventions are listed below:
1. Recognition by accountants
Accounting concepts are recognized by accountants and are part of guidelines for preparation of financial statements whereas accounting conventions are past practices which are commonly used but are not formally recognized as guideline for preparation of financial statements.
2. Legal recognition
Accounting concepts have been developed by professional bodies and may be backed by law and other governance bodies whereas accounting conventions are past practices developed over time and have no backing by governance bodies.
3. Part of accounting standards
Accounting concepts are part of accounting standards whereas accounting conventions have been developed to deal with the changes in financial reporting landscape that are not yet part of accounting standards but can become part of it in future.
Accounting concepts and conventions both are very similar to each other and aim to improve the presentation of financial statements by providing some guidelines for preparing true and fair financial statements. Major difference between two is that accounting concepts are officially recognized and written in guidelines by accountants whereas accounting conventions are not officially recognized and written in guidelines by accountants but have been developed over time.