One basic purpose of preparing financial statements is to compare statements over the years with competitors ’. For these statements to be comparable, the accounting process followed by companies must be consistent and consistent.
Accounting Conventions set out certain guidelines that must be followed when preparing financial statements. This ensures consistency and improves the use of financial statements. Below are few of such accounting conventions:
Separate entity concept: In this sense, a business should be considered as a separate unit from its owner. Therefore, you should be responsible for the exchange of resources between the business and its owner.
Historical cost concept: According to this concept, most, but not all, assets should be recorded at cost at which they were bought.
Money measurement concept: Accounting records only those amounts that can be measured in terms of cash.
Going concern concept: The business will continue to operate indefinitely.
Conservatism concept: A company should record all expected losses and costs, but ignore all expected / unfulfilled profits.
Material concept: Any event that could influence the decision of an experienced investor is considered important, and material assets should be disclosed. Note: All financial transactions are recorded in the ledger, regardless of the material; the concept of material is for research purposes only.
Consistency concept: The company must be consistent in its accounting policies and procedures throughout the years.
Substance over form: All items or issues that may affect user judgment should be disclosed although this is not a requirement in the form. This, in fact, refers to something over the form.
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