Accounting Convention Flashcards
What is the Convention of Consistency?
This convention advises that once an accounting method or principle is adopted, it should be followed consistently in future accounting periods.
If a company uses the straight-line method of depreciation for its fixed assets, it should continue using this method in subsequent years unless there’s a valid reason to change.
What is the Convention of Conservatism?
This convention suggests that accountants should anticipate no profits but provide for all possible losses.
If there is uncertainty about a potential lawsuit, a company will recognize a provision for that expense, even if the final outcome is uncertain. However, unrealized gains are not recognized until they are realized.
What is the Convention of Full Disclosure?
This convention requires that all material facts, which could influence the decisions of the users of financial statements, must be disclosed.
If a company is involved in a legal dispute that could have a significant financial impact, it must disclose this information in the financial statements, along with any potential impact.
What is the Convention of Materiality?
This convention allows accountants to ignore small or insignificant items that would not affect the decisions of the users of financial statements.
A small expenditure like a pen purchased by the business might not need to be separately accounted for, as it doesn’t materially affect the financial position.
What is the Convention of Objectivity?
This convention dictates that financial statements should be based on objective evidence rather than personal judgment or subjective estimates.
When valuing inventory, the cost should be based on the actual invoice or purchase price, not on an estimated value or subjective judgment of the inventory’s worth.
What is the Convention of Consistency in Presentation?
This convention states that the format and presentation of financial statements should remain consistent over time, so users can easily compare data from different periods.
If a company presents its income statement in a certain format in one year, it should follow the same format in subsequent years unless there is a compelling reason to change.
