Accounting is vital in delivering a firm’s information to its stakeholders on its performance, position, and profitability for decision making. Notably, accounting concepts and conventions are employed in developing financial statements based on accuracy and consistency.
While accounting concepts and conventions have a significant role in processing reliable and realistic financial information, the two terms are different.
Accounting Concept vs Convention
The difference between Accounting Concept and Convention is that Accounting concepts are the rules and regulations of accounting, while accounting convention is the set of practices discussed by the accounting bodies before preparing final accounts.
The accounting concept is a theoretical statement. Accounting convention is a procedure agreed by the accounting bodies for preparing final accounts.
Comparison Table Between Accounting Concepts and Accounting Convention
|Parameter of Comparison||Accounting Concepts||Accounting Conventions|
|Basic Abstraction||Accounting concepts are theoretical notions on the preparation of financial statements.||Accounting conventions are procedures and methods followed during the preparation of financial statements.|
|Formulation Process||Set up by accounting bodies with the backing of the law and governance bodies.||They are developed from standard accounting practices.|
|Purpose||Concerned with the maintenance of accounts and recording, classifying as well as interpretation of transactions.||Accounting conventions are concerned with the preparation and presentation of financial statements.|
|Legal Recognition||Legally recognized.||They lack formal and legal recognition.|
|Biasness||There lacks any possible chance for personal judgment or bias.||There is a high probability of personal judgment or bias.|
What are Accounting Concepts?
Accounting concepts refer to the principles that are put in place to ensure that accounting information presented in financial statements of a business entity is given truly and fairly.
Since professionals develop accounting concepts, they act as a foundation for recording business transactions as well as the preparation of final accounts.
Some of the accounting concepts include cost concept, business entity concept, accrual concept, money measurement concept, and matching concept.
What are Accounting Conventions?
On the other hand, accounting conventions refer to the set of practices that are universally accepted and followed by accountants.
Notably, the accounting conventions agreed upon by the accounting bodies are modifiable for the improvement of financial statements quality.
The rise of new financial products, new accounting issues, and changes in the landscape of financial reporting lead to the development of new accounting conventions.
Some of the popular accounting conventions include consistency, conservatism, disclosure, and materiality, among others.
Main Differences Between Accounting Concepts and Accounting Conventions
Accounting concepts and accounting conventions have a shared goal, which is to improve the view of financial information from the financial statements.
However, the two terms are different from each other. The following are the main differences between accounting concepts and accounting conventions.
An accounting concept is a theoretical opinion or notion that is applied during the process of formulating a financial statement of a business enterprise.
On the other hand, an accounting convention refers to procedures and methods that are adopted during the preparation of financial statements for a fair and true view of the financial information provided.
Notably, accounting concepts answer the question of what should be applied during the preparation of financial statements.
On the other hand, accounting conventions answer the question of how financial statements should be developed in a manner that truth and fairness are upheld.
Accounting concepts are set by accounting bodies with the backing of the law and governance bodies.
Accounting conventions, on the other side, are formulated from common accounting processes of accounting, which are agreed upon without the backing of governance bodies.
The formulation process of the accounting concepts and conventions is essential in the determination of legal recognition of either of the accounting terms.
The purpose of accounting concepts is the maintenance of accounts of a business enterprise.
Additionally, accounting concepts are concerned with recording, classifying as well as interpretation of transactions of an enterprise.
On the other hand, accounting conventions have the sole purpose of preparation and presentation of financial statements of a business entity at the end of a financial year.
Professional bodies develop accounting concepts backed by the law as well as other governance bodies.
Additionally, the accounting concepts are recognized by accountants and make part of the guidelines to be followed in the preparation of financial statements.
Through this, accounting concepts acquire both global as well as legal recognition in the accounting world.
On the other hand, accounting conventions are practices that are developed over time without the backing of governance bodies. Unlike accounting concepts, accounting lacks globally formal recognition by accountants.
Therefore, with no formal recognition by accountants globally and backing of governance bodies, the accounting conventions are characterized by the lack of legal recognition.
While using accounting concepts, there are no possibilities of making personal judgment or biases. This follows the fact that the accounting concepts are opinions argued out with the backing of the law, hence unchangeable.
When managing accounts as well as recording, classifying, and interpretation of a business, the accounting concepts are followed to the letter yielding no chance of bias. On the other hand, there is a high probability of committing bias or personal judgment while using accounting conventions.
Accounting conventions are changeable and modifiable over time. Therefore, this yields a probability of making personal judgment or bias while using accounting conventions inevitable.
Frequently Asked Questions (FAQ) About Accounting Concept and Convention
What are the types of Accounting Conventions?
Accounting conventions can be classified into 4 major types that are,
• Full Disclosure
The convention of full disclosure relates to the concept that a business entity should submit true and complete accounting statements and should not withhold any facts that can affect the investors and creditors.
As per this convention, all the facts that are material to the company, investors, clients, and customers should be disclosed in the prescribed manner.
This is an important convention that requires consistent application of accounting rules and procedures for all the accounting periods. This helps in proper statistical comparison of accounting reports.
Conservatism is an important approach in accounting that seeks the business entities to stick with conventional accounting and financial practices with a view to avoiding unwarranted financial risks.
What are the types of Accounting Concepts?
The major accounting concepts are classified as follows:
• Business Entity Concept
The business or company is considered as a separate entity and has an identity that is totally different from that of the owner/owners.
• Going Concern Concept
The accounting practices follow the concept that a business concern or company would continue to exist in the future.
• Accrual Concept
Revenues are recorded or entered when they are earned or accrued and expenses are recorded when they are incurred. The actual time of receiving or paying the cash is not recorded.
• Money Measurement Concept
Only transactions that can be measured in terms of money are entered in the accounting books.
• Dual Aspect Concept
The concept is the foundation of the double-entry system in accounting as per which every transaction has 2 aspects and is entered into 2 different accounts.
• Matching Concept
For every revenue or income entered during an accounting period, the related expenses are also entered for the same period.
• Realization Concept
As per the concept, revenues or incomes can be recorded only when the business concern has delivered the products or services to the clients or customers.
• Accounting Period Concept
An accounting period is the time frame for which an accounting statement is prepared. This could be prepared either monthly, quarterly, half-yearly, or annually and helps the business owners and investors in comparing the financial status of the firm.
Accounting concepts and conventions have a common purpose of improving the presentation of the financial statements of business firms.
However, the differences in the two accounting terms are viewed in their basic abstraction, purpose, recognition, formulation process, and level of bias.
Notably, the accounting conventions are developed in light of accounting concepts.