Session 5 - Accounting Conventions with examples

Session Plan : Accounting Conventions with examples

Introduction (5 min): Define accounting conventions and explain their role in ensuring uniformity and comparability.

Convention of Disclosure (10 min): Explain with examples how all material facts must be disclosed in financial statements.

Convention of Consistency & Materiality (10 min): Discuss with illustrations why consistent methods and material information are important.

Convention of Conservatism (10 min): Explain prudence with real-life examples (e.g., provision for doubtful debts).

Recap & Q/A (10 min): Summarize conventions with case studies and engage students in discussion.

Lecture Material : (PDF, PPT)

Accounting_Conventions_with_Examples.pptx 

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

Accounting Conventions with Examples

1. Meaning

• Accounting Conventions are practices developed through tradition, usage, and common acceptance to ensure consistency and fairness in financial reporting.

• Unlike concepts, they are not legally binding but are generally accepted guidelines that accountants follow.

• Purpose: To ensure clarity, reliability, and comparability of financial statements.

2. Major Accounting Conventions

(A) Convention of Disclosure

• All material and relevant information must be fully disclosed in financial statements.

• Prevents hiding of crucial facts that affect decision-making.

• Notes to Accounts are often used for additional disclosure.

Example:
If a company has given a large loan to its directors, it must be disclosed in the financial statements.

(B) Convention of Consistency

• Accounting methods and policies should be applied consistently from one period to another.

• Ensures comparability of financial results across years.

• Changes in method are allowed only if:

  1. Required by law, or

  2. Results in better presentation.

Example:
If a company uses the Straight-Line Method (SLM) for depreciation, it should not switch to Written Down Value (WDV) without valid reason.

(C) Convention of Conservatism (Prudence)

• “Anticipate no profits, but provide for all possible losses.”

• Assets and incomes should not be overstated; liabilities and expenses should not be understated.

• Encourages cautious financial reporting.

Example:
If stock is purchased at ₹50,000 and current market value is ₹45,000 → Closing stock is recorded as ₹45,000.
Similarly, a provision for doubtful debts is created for uncertain recoveries.

(D) Convention of Materiality

• Only material (significant) items that influence decision-making should be recorded and disclosed.

• Insignificant items can be ignored or combined for simplicity.

Example:

• Buying a stapler worth ₹200 → Expensed immediately instead of being shown as an asset.

• Small stationery expenses may be grouped under “Office Expenses.”

3. Differences Between Concepts & Conventions

Aspect Concepts (e.g., Accrual, Going Concern) Conventions (e.g., Disclosure, Consistency)

Definition Basic assumptions & rules Practices based on tradition & acceptance

Nature Theoretical foundation Practical application

Binding? Formalized in GAAP/Standards Generally accepted, not legally binding

Objective Framework for accounting Uniformity, fairness, comparability

 4. Importance of Accounting Conventions

1. Ensure transparency and fairness in reporting.

2. Promote consistency for comparison across time periods.

3. Encourage prudence in financial statements.

4. Improve reliability and trustworthiness of information.

5. Serve as a practical application of accounting concepts.

5. Quick Recap Table

Convention Explanation Example

Disclosure All material facts must be shown Loans to directors disclosed in Notes

Consistency Use same methods across years Same depreciation method followed

Conservatism Provide for losses, not profits Stock valued at lower of cost/market

Materiality Record only significant items Stapler ₹200 expensed immediately

(Q2) : Video Based Content (Youtube): www.youtube.com/watch?v=hEu6aZ9STTE 

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform): forms.fillout.com/t/etez3LP8suus