Accounting is vital in delivering a firm’s decision-making information to its stakeholders on its performance, position, and profitability. Notably, accounting concepts and conventions are employed in developing financial statements based on accuracy and consistency.
While accounting concepts and conventions are significant in processing reliable and realistic financial information, the two terms differ.
Key Takeaways
- Accounting concepts are basic principles guiding the accounting process, while conventions are customary practices followed by accountants.
- Concepts form the foundation of accounting standards, whereas conventions help ensure consistency and comparability across financial statements.
- Examples of accounting concepts include accrual and going concern, while examples of conventions include consistency and conservatism.
Accounting Concept vs Convention
Accounting concepts are fundamental principles that underlie the preparation of financial statements. It is the fundamental principles that underlie the preparation of financial statements. Accounting conventions are generally accepted practices that are followed in accounting.
The accounting concept is a theoretical statement. An accounting convention is a procedure agreed upon by the accounting bodies for preparing final accounts.
Comparison Table
| 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, and 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. |
| Bias | 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 put in place to ensure that accounting information presented in the financial statements of a business entity is given honestly and fairly.
Since professionals develop accounting concepts, they act as a foundation for recording business transactions and preparing 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 improving financial statements’ quality.
The rise of new financial products, new accounting issues, and changes in the financial reporting landscape lead to the development of new accounting conventions.
Some popular accounting conventions include consistency, conservatism, disclosure, and materiality.
Main Differences Between Accounting Concepts and Accounting Conventions
Accounting concepts and conventions have a shared goal: 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.
Basic Abstraction
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 adopted when preparing financial statements for a fair and true view of the financial information provided.
Notably, accounting concepts answer what should be applied when preparing financial statements.
On the other hand, accounting conventions answer how financial statements should be developed, so that truth and fairness are upheld.
Formulation Process
Accounting concepts are set by accounting bodies with the backing of the law and governance bodies.
Conversely, accounting conventions are formulated from standard accounting processes, which are agreed upon without the backing of governance bodies.
The formulation process of the accounting concepts and conventions is essential in determining the legal recognition of either of the accounting terms.
Purpose
The purpose of accounting concepts is the maintenance of accounts of a business enterprise.
Additionally, accounting concepts involve recording, classifying, and interpreting an enterprise’s transactions.
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.
Legal Recognition
Professional bodies develop accounting concepts backed by the law and other governance bodies.
Additionally, the accounting concepts are recognized by accountants and make part of the guidelines to be followed in preparing financial statements.
Through this, accounting concepts acquire global and 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 the backing of governance bodies, the accounting conventions are characterized by a lack of legal recognition.
Bias
While using accounting concepts, there are no possibilities of making personal judgments or biases. This follows 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 interpreting 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 judgments or biases while using accounting conventions inevitable.
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
