Accounting Concepts and Conventions
When you are preparing financial statements, it is important to understand the various accounting concepts and conventions. In this article, we’ll discuss some of the most common ones. For example, the matching concept states that revenue and related expenses should be recorded at the same time. This allows for a cause-and-effect relationship between income and purchases. For example, you should record a commission from a sale in March, but expenses that relate to that revenue should be recorded in the same period.
Accounting concepts and conventions are fundamental guidelines for accounting, and they guide how companies record their financial transactions. They also direct how businesses record transactions and prepare their financial statements. Many countries around the world use these standards, and they are maintained by the International Accounting Standards Board, or IASB, which was previously known as the International Accounting Standards Committee. In addition to being fundamentals, these standards are important when it comes to preparing financial statements.
A key accounting concept is the concept of prudence. It describes how income is recognized when goods are exchanged for valuable consideration. The materiality convention states that significant materials must be recorded in the financial statements. A depreciation of a calculator or a wall clock, for example, does not require recording a write-off, but should be reported as a loss. In addition to these concepts and conventions, you should also learn about the definition of a “going concern” and how they apply to your organization.
The realization concept explains when revenue and expenses are recorded. The realization concept requires that revenues are recognized when they are delivered to customers. The materiality convention states that the economic event relates to a material. An insignificant amount of money is not reported in the financial statements. For example, a calculator’s depreciation will be recorded as an expense when it is received. However, a wall clock will be depreciated over the life of its use. The application of these concepts and conventions helps to understand the difference between the two.
The realization concept explains that income is recognized when goods are exchanged for valuable consideration. The materiality convention specifies that significant materials must be recorded in the financial statements. This principle encourages accountants to be conservative. For example, if two transactions have the same value, the lower value should be recorded. A second example of a materiality principle is the requirement for a company to disclose all relevant information. By comparing these two terms, you will be able to determine what type of information they should report.
While the terms accounting concepts and conventions are similar, they are quite different. While accounting concepts are generally accepted, accounting conventions are the rules by which the process of recording complicated transactions is guided. They provide standards for the preparation of financial statements. There are two main types of conventions: the matching concept and the prudence concept. For example, the matching concept and the prudence one. The match and the corresponding principle.