Table of Contents
What are Accounting Concepts?
Accounting concepts are the fundamental principles, presumptions, and conditions that define the boundaries and constraints within which accounting operates.
The accounting concept must be used at each stage of documenting an entity’s financial transaction, demonstrating its importance.
Accountants can save time, effort, and energy by using the pre-established framework provided by generally accepted accounting principles.
It improves the clarity, dependability, relevance, and comparability of financial statements and reports, as well as their understanding and comparison quality.
It forbids the documentation of non-monetary transactions and makes no provision for the reporting of insignificant transactions. Because it prevents assets from being recognized at their realizable values, financial statements do not provide an accurate picture of the entity’s financial situation because the materiality level varies between entities, which can jeopardize the comparability of financial statements.
There are nine types of accounting concepts which are as follows:
- Business Entity Concept
- Money Measurement Concept
- Dual Aspect Concept
- Going Concern Concept
- Accounting Period Concept
- Cost Concept
- The Matching Concept
- Accrual Concept
- Realization Concept
What are Accounting Conventions?
Accounting conventions are rules that businesses employ to determine how to record specific business transactions that accounting standards do not yet completely cover. Although not legally obligatory, these guidelines and practices are typically recognized by accounting organisations.
In essence, they are made to encourage uniformity and assist accountants in resolving real-world issues that might occur when compiling financial accounts. Sometimes a certain circumstance is not governed by a clear rule in the accounting standards. Accounting conventions may be used in such circumstances.
There are many presumptions, conceptions, norms, and traditions in accounting.
There are currently fewer accounting conventions that can be used as the scope and level of complexity of accounting standards continue to grow. Even accounting practices are not rigid rules. Alternatively, they can change over time to reflect fresh perspectives on the most effective ways to record transactions.
Accounting norms are crucial because they guarantee that transactions are recorded uniformly by several organizations. Investors may more easily evaluate the financial performance of various companies, including rival ones operating in the same sector, by using a consistent technique.
Despite this, accounting practices are far from perfect. They can be vaguely defined at times, giving businesses and their accountants room to possibly bend or exploit them to their benefit.
Difference Between Accounting Concepts and Conventions
- Accounting concepts are accounting presumptions that an organization’s accountant employs when recording business activities and preparing final accounts whereas Accounting conventions are tenets that have been established by the business as a guideline while generating financial statements.
- An accounting concept is only a theoretical idea that is used when creating financial statements whereas accounting conventions are practices that must be followed in order to present an accurate financial statement.
- Accounting conventions stem from recognized common accounting procedures, whereas accounting concepts are established by accounting bodies.
- The fundamental components of the accounting concept are the recording of transactions and the upkeep of accounts. Accounting conventions, on the other hand, place a premium on creating and presenting financial statements.
- Adoption of an accounting concept carries no risk of bias or personal judgment; however, adoption of accounting conventions carries a significant risk of bias.
Comparison Between Accounting Concepts and Conventions
|Parameters of Comparison||Accounting Concepts||Accounting Conventions|
|Meaning||accounting presumptions that an organization’s accountant employs when recording business activities.||Are established guidelines for generating financial statements.|
|What it is||A theoretical idea||Established practices|
|Created by||Accounting institutions||Accounting procedures|
|Scope||Recording of transactions||Place a premium on generating financial statements|
|Prejudice||No risk||Risk of bias|