Accounting Conventions

  • Accounting Conventions refer to customs or generally accepted practices which are adopted either by general agreement or by common consent among accountants.
  • Conventions may undergo change with time to improve the quality of accounting information.
  • As per convention of Going Concern, it is assumed, that the business firm would continue to carry out its operations indefinitely, i.e., for a fairly long period of time.On the basis of this assumption, fixed assets are valued at original cost less depreciation.
  • Convention of Consistency states that accounting procedures and methods should remain consistent from one year to another. If these are changed from year to year, net profits of different years will not be comparable. However, this concept does not prohibit change in accounting policies.
  • As per convention of Accrual, revenue is recognised when it is earned. It is immaterial whether the cash is received or not. This assumption applies equally to revenues and expenses. Accrual convention follows matching principle of accounting. There is consistency in computation of profits in different years.
  • Accounting concepts are established by law whereas accounting conventions are guidelines based upon custom or general agreement. Accounting concepts are uniformly adopted whereas accounting conventions are accepted by norms.

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  • Q1

    Business will continue for a long period of time is stated by

    Marks:1
    Answer:

    going concern concept.

    Explanation:
    The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e., for a fairly long period of time and would not be liquidated in the foreseeable future. In the absence of this assumption, no business will purchase fixed assets but hire those.
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  • Q2

    Fixed assets are recorded at their original cost and depreciated year by year, on the basis of

    Marks:1
    Answer:

    going concern assumption.

    Explanation:
    On the basis of this assumption, fixed assets are recorded at their original cost and are depreciated in a systematic manner without reference to their market value.
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  • Q3

    Accrual assumption is similar to

    Marks:1
    Answer:

    revenue principle.

    Explanation:

    Accrual assumption and revenue principle are similar in nature. Both of them helps in knowing whether the firm has earned profit or suffered a loss.

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  • Q4

    Explain the following conventions in detail:
    a) Full Disclosure
    b) Materiality
    c) Consistency

    Marks:3
    Answer:

    Full Disclosure: According to this convention, there should be complete reporting on financial statements of all significant information relating to the economic affairs of a business.

    Disclosure of material facts does not mean, to leak out the secrets of the business but to disclose sufficient information which is of material interest to the users of financial statements.

    Materiality: According to this convention, a transaction should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of an informed investor.

    Only those items, that have a significant effect, should be disclosed. Whether an item is material or not, depends on its nature or amount and also on personal judgment.

    Consistency: According to this convention, accounting practices once selected and adopted should be consistently applied year after year. It helps in understanding the accounting information more clearly and makes it comparable with that of previous years.

    If a business desires to adopt an alternative practice, it must disclose the change and its impact on the profit or loss.

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  • Q5

    Explain Going Concern Concept.

    Marks:2
    Answer:

    According to the Going Concern Concept, it is assumed that the business will continue to exist for a long period in future and there is no intention to scale down the operations significantly.

    Due to this concept, fixed assets are recorded at their original cost and depreciated in a systematic manner without reference to their market value.

    Moreover, owing to this concept, outside parties enter into long-term contracts with the enterprise, assuming that the business will continue to operate.

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