ACCOUNTING CONVENTIONS

Accounting conventions are bearing the practical considerations in recording the
transactions of the business enterprise in systematic manner.
l Convention of consistency
l Convention of conservatism
l Convention of disclosure
1.6.1 Convention of consistency
The nature of recording the transactions should not be changed at any cause or moment.
It should be maintained throughout the life period of the firm. If a firm follows the
straight line method of charging the depreciation since its inception should be followed
without any change . The firm should not alter the method of charging the depreciation
from one method to another. The change cannot be entertained. If any change has to be
incorporated, the valid reason for change should be emphasized.
1.6.2 Convention of conservatism
The conservatism wont give any emphasis on the anticipation of the firm, instead it gives
paramount importance to all possible uneventualities of the firm without considering the
future profits. The most important of the rule of guidance at the moment of valuing the stock is as
follows:
Stock Valuations:
"Stock of the goods should be valued either market price or cost whichever is lower"
To anticipate the future losses due to default in the payments of the customers;
Provision is created for bad and doubtful debts of the firm in order to meet the losses
expected. out of the defaulters.
Concept of mutual agreement and sharing of benefits
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1.6.3 Convention of disclosure Financial Accounting
According to this convention, the entire status of the firm should be highlighted / presented
in detail without hiding anything; which has to furnish the required information to various
parties involved in the process of the firm.
Next stage is to classify the accounts into various categories.
Classification of Accounts: The entire process of accounting brought under three major
segments ; which are broadly grouped into two categories.
Check Your Progress
(1) Accounting principles are
(a) Accounting concepts only (b) Accounting
conventions
(c) Accounting concepts & conventions only (d) None of the above
(2) Money measurement concept is
(a) Financial transactions only (b) Non financial transactions only
(c) Both (a) & (b) (d) None of the above
(3) Distinction of the assets is on the basis of
(a) Going concern concept (b) Time period concept
(c) Business entity concept (d) Duality concept
(4) The worth of transactions are identified only through
(a) Cost concept (b) Matching concept
(c) Business entity concept (d) Double entry accounting concept
(5) Total Liabilities = Total Assets is dealt
(a) Business entity concept (b) Cost concept
(c) Going concern concept (d) Duality concept
The entire accounts of the enterprise is broadly classified into two categories viz Personal
Accounts and Impersonal Accounts. The Impersonal accounts is further classified into
two categories viz Real accounts and Nominal accounts.
What is personal accounts?
It is an account which deals with a due balance either to or from these individuals on
a particular period. It is an account normally reveals the outstanding balance of the firm
to individuals e.g. suppliers or outstanding balance from individuals e.g. customers. This
Accounts
Personal
Accounts
Impersonal
Accounts
Real Accounts Nominal
Accounts
Persons
Out of
Nature
Persons
Out of
Representations
Persons
Out of
Law Relationship
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Accounting and Finance
for Managers
is the only account which emphasizes the future relationship in between the business
firm and the individuals.
The personal accounts can be classified into three categories.
1.6.4 Persons of Nature
Persons who are nothing but outcome of nature i.e., almighty.
1.6.5 Persons of Artificial relationship
Persons who are made out of artificial relationship through legal structure is known as
organizations, corporate, partnership firm and so on. The companies and partnership
firm are governed by the Companies Act 1956 and the partnership act. The relationship
among the owners of the company or partners of the firm are totally structured through
respective laws.
E.g.: LIC, SBI, Companies are most important illustrations governed by the artificial
relationship among the members through LIC act, SBI act and the Companies act 1956
and so on respectively.
1.6.6 Persons of representations
This classification represents amount outstanding or prepaid in connection with the
individual transactions.
(i) Outstanding of electricity charges: Electricity charges outstanding is with
reference to the electricity board TNEB, Rent prepaid refers that rent of the office
is made as an advance payment for the forthcoming month to the owner of the
building.
The personal account is the account of future relationship; to maintain the relationship
of future in two different angles viz Receiver of the benefits from the firm and
giver of the benefits to the firm.
1.6.7 Receiver of the benefits
For E.g.: The credit sale of the goods worth of Rs 1,500 to Mr X. In this transaction Mr.
X is the receiver of the benefits through the credit sale of the firm. Till the collection of
the sale benefits, the firm should maintain the relationship of business with the Mr. X in
the books of accounts.
1.6.8 Giver of the benefits
For E.g: The credit purchase of the goods worth of Rs 3,000 from Mr. Y. The giver of
the goods nothing but the supplier of the goods Mr. Y should be recorded in the books of
the firm till the payment of dues of the credit purchase. The future relationship is maintained
in the books of the accounts till the payment process is over.

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