Accounting is a business language, which is used to communicate financial information to the company’s stakeholders, regarding the performance, profitability and position of the enterprise and help them in rational decision making. The financial statement is based on various concepts and conventions. Accounting concepts are the fundamental accounting assumptions that act as a foundation for recording business transactions and preparation of final accounts.
On the other extreme, accounting conventions are the methods and procedures which have universal acceptance. These are followed by the firm while recording transactions and preparation of financial statement. Let’s take a look at the article to understand the difference between accounting concept and conventions.
Content: Accounting Concept Vs Accounting Conventions
|Basis for Comparison||Accounting Concept||Accounting Convention|
|Meaning||Accounting concepts refers to the rules of accounting which are to be followed, while recording business transactions and preparing final accounts.||Accounting conventions implies the customs or practices that are widely accepted by the accounting bodies and are adopted by the firm to work as a guide in the preparation of final accounts.|
|What is it?||A theoretical notion||A method or procedure|
|Set by||Accounting bodies||Common accounting practices|
|Concerned with||Maintenance of accounts||Preparation of financial statement|
Definition of Accounting Concept
Accounting Concepts can be understood as the basic accounting assumption, which acts as a foundation for the preparation of financial statement of an enterprise. Indeed, these form a basis for formulating the accounting principles, methods and procedures, to record and present the financial transactions of business.
These concepts provide an integrated structure and rational approach to the accounting process. Every financial transaction that occurs is interpreted taking into consideration the accounting concepts, which guides the accounting methods.
- Business Entity Concept: The concept assumes that the business enterprise is independent of its owners.
- Money Measurement Concept: As per this concept, only those transaction which can be expressed in monetary terms are recorded in the books of accounts.
- Cost concept: This concept holds that all the assets of the enterprise are recorded in the accounts at their purchase price
- Going Concern Concept: The concept assumes that the business will have a perpetual succession, i.e. it will continue its operations for an indefinite period.
- Dual Aspect Concept: It is the primary rule of accounting, which states that every transaction effects two accounts.
- Realisation Concept: As per this concept, revenue should be recorded by the firm only when it is realized.
- Accrual Concept: The concept states that revenue is to be recognized when they become receivable, while expenses should be recognized when they become due for payment.
- Periodicity Concept: The concept says that financial statement should be prepared for every period, i.e. at the end of the financial year.
- Matching Concept: The concept holds that, the revenue for the period, should match the expenses.
Definition of Accounting Convention
Accounting Conventions, as the name suggest are the practice adopted by an enterprise over a period of time, that rely on the general agreement between the accounting bodies and helps in assisting the accountant at the time of preparation of financial statement of the company.
For the purpose of improving quality of financial information, the accountancy bodies of the world may modify or change any accounting convention. Given below are the basic accounting conventions:
- Consistency: Financial statements can be compared only when the accounting policies are followed consistently by the firm over the period. However, changes can be made only in special circumstances.
- Disclosure: This principle state that the financial statement should be prepared in such a way that it fairly discloses all the material information to the users, so as to help them in taking a rational decision.
- Conservatism: This convention states that the firm should not anticipate incomes and gains, but provide for all expenses and losses.
- Materiality: This concept is an exception to the full disclosure convention which states that only those items to be disclosed in the financial statement which has a significant economic effect.
Key Differences Between Accounting Concept and Convention
The difference between accounting concept and convention are presented in the points given below:
- Accounting concept is defined as the accounting assumptions which the accountant of a firm follows while recording business transactions and preparing final accounts. Conversely, accounting conventions imply procedures and principles that are generally accepted by the accounting bodies and adopted by the firm to guide at the time of preparing the financial statement.
- Accounting concept is nothing but a theoretical notion that is applied while preparing financial statements. On the contrary, accounting conventions are the methods and procedure which are followed to give a true and fair view of the financial statement.
- While accounting concept is set by the accounting bodies, accounting conventions emerge out of common accounting practices, which are accepted by general agreement.
- The accounting concept is basically related to the recording of transactions and maintenance of accounts. As against, the accounting conventions focus on the preparation and presentation of financial statements.
- There is no possibility of biases or personal judgement in the adoption of accounting concept, whereas the possibility of biases is high in case of accounting conventions.
To sum up, the accounting concept and conventions outline those points on which the financial accounting is based. Accounting concept does not rely on accounting convention, however, accounting conventions are prepared in the light of accounting concept.