Accounting Convention

What is an accounting convention?

An accounting convention is a commonly agreed-upon way to record certain transactions on financial statements. These conventions are helpful when new issues arise that are not covered by accounting standards, which are the official, established regulations set by governing bodies. 

Although accounting conventions are not legally binding, they help address issues when there is not yet a set standard or rule. 

As regulatory groups address gaps in existing practices, they create new accounting standards to replace existing accounting conventions. Still, accounting conventions play an essential role as stopgap measures to ensure consistency among companies within the same industry. 

Companies use accounting software to ensure they follow conventions and remain compliant with Generally Accepted Accounting  Principles (GAAP). Accounting software can also save organizations considerable time by streamlining and organizing transactions.

Types of accounting conventions

Financial professionals across all industries recognize four accounting conventions. These conventions are as follows:

• Conservatism: An accountant should work to mitigate risk by choosing the most conservative option. For example, when choosing between two numbers, the one reflecting least favorably on the company’s financial situation should be recorded. Profit should never be exaggerated and losses should always be taken into consideration. This principle ensures accountants don’t overestimate, which could be misleading to investors.
• Consistency: To allow for comparison across accounting cycles, the same methods should be used over time. By sticking with consistent policies and assumptions, organizations can easily compare concepts like inventory tracking or expenditures. The consistency convention also gives stakeholders peace of mind that financial statements are reliable.
• Full disclosure: An accountant must report all information and figures fully and accurately, even if the data does not portray the organization positively. For example, the company’s debts and fees paid during dispute resolution toward litigation should be revealed, even if they deter potential investors.
• Materiality: All important facts and materials needed to interpret financial statements should be disclosed. That way, an organization’s investors and key stakeholders have access to all necessary information when making decisions. 

Benefits of accounting conventions

An accountant can save time and reduce the hassle when unusual recording or reporting situations arise by following accounting conventions. These conventions can also have benefits for the organization itself by:

• Providing consistency: Accountants use the same conventions when working on all company documents, such as quarterly balance sheets and annual reports. 
• Boosting credibility: Investors and analysts can rest assured that the financial statements are reliable when a company follows accounting conventions. 
• Creating accuracy: If each organization within an industry uses the same accounting conventions, it’s easier to make direct comparisons between performance in a specific period.

Account convention vs. accounting concepts

Accounting conventions and accounting concepts are both used to record financial data for organizations. Sometimes the two terms are used interchangeably, but they have some important differences. 

Accounting conventions help dictate how to record transactions on financial statements that aren’t addressed by accounting standards. They are a set of implied rules that accountants follow to ensure consistency.

Accounting concepts are abstract guidelines that serve as the foundation of all accounting recording and practices. For example, one such principle is realization, which ensures that a company records an asset at cost until its total value is realized.

Ultimately, accounting concepts are more about theory, whereas accounting conventions are more about procedure. Because regulatory bodies create accounting concepts, they are legally binding. Accounting conventions, which are based on accounting standards, do not hold legal authority.