Accounting convention definition
/What is an Accounting Convention?
An accounting convention is a common practice used as a guideline when recording a business transaction . It is used when there is not definitive guidance in the accounting standards that govern a specific situation. Thus, accounting conventions serve to fill in the gaps not yet addressed by accounting standards.
As the range and detail of accounting standards continue to increase, there are fewer areas in which accounting conventions can still be used. However, a large number of accounting conventions are needed in industry-specific accounting, since many of these areas have not yet been addressed by the accounting standards.
Accounting conventions are a necessary part of the accounting profession, since they result in transactions being recorded in the same way by multiple organizations. This allows for the reliable comparison of the financial results, financial position , and cash flows of many organizations.
Accounting conventions may change over time to reflect shifts in the preponderance of general opinion regarding how to deal with a transaction.
Disadvantages of Accounting Conventions
There are some concerns with using accounting conventions, which are as follows:
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Consistency of use . Many accounting conventions are not consistently followed across an industry, resulting in some variability in the reported financial results and financial positions of competing businesses. This can make it difficult to analyze an industry.
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Subject to manipulation . Since accounting conventions have not yet been codified into accounting standards, it is possible that company managers will adjust the underlying accounting to suit their reporting needs. This can result in material levels of misstatement in a reporting entity’s financial statements.
These issues can be addressed by developing formal accounting standards in areas where the consistency of use and reporting manipulation have reached notable levels.
