What is an Accounting Convention? - QS Study

Definition:

Accounting Convention is a guidelines that arise from the practical application of accounting principles. An accounting convention is not a legally-binding practice; rather, it is a generally-accepted convention based on customs, and is designed to help accountants overcome practical problems that arise out of the preparation of financial statements. As customs change, so to will accounting conventions.

Accounting conventions are standards, customs or guidelines regarding the application of accounting rules.

How it works:

There are four widely recognized accounting conventions that guide accountants:

1. Be conservative. In other words, play it safe.

2. Disclose in full.

3. Be consistent. In other words, use the same method for calculating and reporting similar events.

4. Report everything that is important. This is also known as the materiality convention. In other words, an item or event is material (and thus should be disclosed) if knowledge of the event or item might reasonably influence the users of the financial statements.

 

An accounting convention is a common practice used as a guideline when recording a business transaction. It is used when there is not a definitive guideline in the accounting standards that govern a specific situation. Thus, accounting conventions serve to fill in the gaps not yet addressed by accounting standards.

As the range and detail of accounting standards continue to increase, there are fewer areas in which accounting conventions can still be used. However, a large number of accounting conventions are needed in industry-specific accounting, since many of these areas have not yet been addressed by the accounting standards.

Accounting conventions are a necessary part of the accounting profession, since they result in transactions being recorded in the same way by multiple organizations. This allows for the reliable comparison of the financial results, financial position, and cash flows of many organizations.

Accounting conventions may change over time to reflect shifts in the preponderance of general opinion regarding how to deal with a transaction.