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Accounting Concepts And Conventions

As an accounting and finance student of KNUST, I constantly undertake research to discover real facts in my field of study.

accounting-concepts-and-conventions

General Overview

Accountancy as a professional program is not done anyhow. Accounting is governed by strict rules and customs penned by various professional bodies in the field such as the International Accounting Standards Board (IASB), Financial Reporting Standards (FRS) and others, which have been adopted and considered as the general rules of action. These rules serve to guide accountants in carrying out their professional work. These rules and customs are referred to as Accounting Concepts and conventions.

What Are Accounting Concepts?

I will define Accounting Concepts as the general assumptions that are adhered to in the preparation and disclosure of items in the financial statements. I want to reiterate that accounting concepts are assumptions and not otherwise. They can be referred to as accounting principles, accounting postulates, accounting imperatives, etc.

Accounting Conventions

Accounting conventions are the practices in accountancy which have come to stay as a result of their continuous usage. They conform to general and specific standards. They are practical rules governing the profession and not theoretical ideals.

So in a general, accounting concepts and conventions are aimed at establishing some form of purpose, direction and uniformity in the preparation of financial statements all over the world.

The Fundamental Accounting Concepts

There are basically four accounting concepts that are adhered to in the preparation of all financial statements. They are regarded as fundamental because you can't prepare a complete and acceptable financial statement without observing them. They include:

  1. Going Concern Concept
  2. Accrual Concept
  3. Consistency Concept
  4. Prudence Concept

1. Going Concern Concept

This concept assumes that the business will continue to operate into the foreseeable future. Thus, when preparing financial statements, accountants have it in mind that the business will continue for an indefinite period. This is the reason why we have current and fixed assets on the balance sheet. This concept also is the reason behind "balance carried down or forward" in balancing off of accounts.

2. Accrual Concept

This concept is also known as the Matching Concept. This assumption informs the accountants about how to ascertain profit. This concept states that in determining profit, the expenditure (whether paid or accrued) for a period must be matched against the revenue for the period (whether received or not). This is the reason why expenses accrued and revenues not received are found in financial statements. The reason is to disclose the actual profit or loss for the financial year.

3. Consistency Concept

This concept assumes that the Accountant maintains a particular method of recording accounting transactions over one financial year. This is for the purpose of comparability and to prevent misrepresentation of financial results. This also helps management in making informed financial decisions. The Accountant can change the method if necessary, for a better presentation.

4. Prudence Concepts

I personally call this concept "the economic concept of accounting." This concept forbids accountants to anticipate profits, but requires that they consider all possible losses. That is if the accountant has two alternatives, he is expected to select the one which will result in lower profits. The accountant can overestimate losses, but underestimate profits. This is the reason why we make provisions for bad and doubtful debts, depreciation, etc.

Other Accounting Concepts And Conventions

Other accounting concepts and conventions that underlie the preparation and presentation of financial statements includes

5. Business Entity Concept

The business entity concept assumes that the business is an artificial person, separate from the owner. Therefore, in the preparation of financial statements, accountants must not include the activities of the owner(s) in the financial statements. Transactions of the owner(s) only affect capital. This is why the capital of a business is seen as a liability of the business to it's owner(s). Profit and drawings are seen as such.

6. Historical Cost Concept

This is simply referred to as Cost Concept. The concept states that items (assets and expenses) are recorded in the books of accounts at cost (the price at which they were acquired). This is why provision for depreciation are made for fixed assets to spread the cost of the assets over their estimated useful life. In the Statement of Financial Position, fixed assets are recorded at cost and accumulated depreciation is deducted to obtain the Net Book Value of the assets.

Other Concepts include:

  • Dual Aspect Concept
  • Money Measurement Concept
  • Realization Concept
  • Concept of Materiality
  • Full Disclosure Concept
  • Substance Over Form
  • Objectivity

Questions can be posted in the comments section for further clarifications and for the publication of related articles.

© 2020 Ernest Festus Awudey

Comments

Miebakagh Fiberesima from Port Harcourt, Rivers State, NIGERIA. on August 20, 2020:

Man, you're good on it to to!

Ernest Festus Awudey (author) from Ho, Ghana. on August 20, 2020:

Thanks for the advice, Miebakagh. Actually, I have an experience in teaching so your suggestion is highly possible. Thanks so much for the encouragement.

Miebakagh Fiberesima from Port Harcourt, Rivers State, NIGERIA. on August 20, 2020:

Hi Festus, the way you express and present the idea is very easy to follow. And if you had a certificate in practical teaching, you'll become a good accountancy teachear.

Ernest Festus Awudey (author) from Ho, Ghana. on August 18, 2020:

Thanks for yours rowkish.

Rowkish on August 18, 2020:

Well done Festus ⭐