Accounting is a complex process that requires companies to conform to several rules and regulations. These rules usually come from accounting standards relating to specific areas within the accounting process. However, these standards may not cover all transactions. In that regard, accounting concepts and conventions can be significantly crucial for companies.
What are Accounting Concepts?
Accounting concepts refer to the rules and principles that dictate the accounting process. These concepts act as a base for preparing financial statements. On top of that, accounting concepts define the limits and parameters for the accounting process. These concepts come from generally accepted principles, which dictate the consistency of financial statements.
The primary objective that accounting concepts seek to achieve is uniformity and consistency. These concepts support the accounting standards that companies follow. However, they do not apply to specific business transactions. Instead, they dictate the accounting process as a whole. On top of that, accounting concepts provide an integrated and rational approach to accounting.
Overall, accounting concepts are basic accounting principles used as a base for financial statements. Companies follow various accounting concepts during their accounting processes. Some of the most commonly applied accounting concepts include the following.
- Business entity concept
- Money measurement concept
- Going concern concept
- Dual aspect concept
- Accrual concept
- Matching concept
- Periodicity concept
- Cost concept
What are Accounting Conventions?
As mentioned above, accounting standards cover specific areas. Without these standards, companies may not have a uniform approach toward accounting for those areas. However, accounting conventions address those issues. These conventions help companies determine how to record specific business transactions. However, they only cover areas where the accounting standards do not provide guidance.
Accounting conventions provide the accounting treatment for business transactions not addressed by accounting standards. These conventions are not mandatory for companies to follow. However, they provide a generally accepted approach toward accounting for specific areas. In most cases, accounting bodies also support using these conventions to achieve uniformity and consistency.
Accounting conventions offer a set of best practices to record financial transactions. However, accounting conventions may change with time. Since accounting conventions are best practices, those practices may alter. Companies usually follow the four accounting conventions below.
- Conservatism
- Consistency
- Full disclosure
- Materiality
What is the difference between Accounting Concepts and Conventions?
The primary difference between accounting concepts and conventions comes from their definitions. Accounting concepts are rules and regulations that dictate the accounting process. In contrast, accounting conventions provide a set of best practices that companies use. Using the former is mandatory for companies when preparing financial statements. The latter, however, is optional.
Accounting concepts and conventions promote consistency and uniformity. Accounting concepts come from accounting bodies and get backed by the law and governance bodies. In contrast, accounting conventions come from standard accounting practices. The former covers the accounting process as a whole. However, accounting conventions only apply to areas that accounting standards do not cover.
Accounting concepts are also more critical than accounting conventions. The former is legally recognized and mandatory for all companies. On the other hand, accounting conventions lack formal and legal recognition. Although accounting bodies may endorse those conventions, they are optional. Similarly, accounting conventions hinder personal judgment. However, accounting conventions are more prone to bias.
Conclusion
Accounting concepts and conventions are a crucial part of the accounting process. Accounting concepts include a set of rules and regulations that companies must follow. In contrast, accounting conventions provide a set of best practices for areas that accounting standards don't cover. While both promote consistency, they have several differences, as discussed above.
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