Difference Between Accounting Concepts And Conventions

The word “accounting” refers to a business language used in communicating the financial information of a company to its stakeholders as regards the enterprise’s performance, profitability, and position, which then assists in rational decision-making. The financial information or statements of a business organization are based on various concepts and conventions that are categorized as “Accounting Concepts” and “Accounting Conventions.”

Accounting concepts are the basic accounting assumptions and principles that serve as the foundation for preparing financial statements to give a true and fair view of the financial performance and position of an enterprise. They are abstract ideas that can be used in systematizing the functions of accounting situations and processes to explain the parameters and constraints of how accounting firms operate. Accounting concepts are guides to accounting methods, thereby providing an integrated structure and rational approach to the accounting process. They are the basis used in formulating the accounting principles, methods, and procedures to record and present the financial transactions of a business.

Importance of Accounting Concept

Accounting concepts are important for the following reasons:

  • To ensure that businesses are truthful in their financial reporting.
  • To create a foundation for solving accounting disputes that may come up.
  • To establish an accounting standard for a company.
  • To quickly confirm information recorded by an accountant.

11 Basic Accounting Concept

Accounting concepts are, however, categorized into different segments, and these are:

  • Cost Concept: To avoid arbitrary values, all assets owned by the business are recorded in the accounts at their true purchase price.

  • Accrual Concept: Revenue is recognized when it becomes receivable, while expenses are accounted for when due for payment.

  • Matching Concept: This states that income over a given time period should be in line with expenses in order to calculate profits.

  • Consistency Concept: Transactions and valuations should follow similar methods to make financial performances easy to compare.

  • Periodicity Concept: Financial statements are to be prepared at the end of every financial year.

  • Business Entity Concept: This states that each business is independent of its owner, i.e., whatever affects a business might not affect the owner.

  • Money Measurement Concept: This states that only monetary transactions should be recorded in the book of accounts.

  • Going Concern Concept: This assumes that the business will continue indefinitely.

  • Realization Concept: Income is recorded only after the total amount received has been confirmed.

  • Dual-Aspect Concept: This states that every transaction affects both the debit and credit sides of the account.

  • Prudence Concept: Profits are not recognized until sales is completed.

Meanwhile, accounting conventions are past practices adopted by an organization for the preparation of financial statements. They are generally accepted accounting bodies’ agreements that have developed over time and assist in the preparation of financial accounts. Accounting conventions are a set of guidelines that help businesses decide how to react to certain transactions and also ensure that multiple companies record transactions in the same way. They are used to provide consistency, and clarity, and overcome practical problems that occur in the course of preparing financial statements.

Importance of Accounting Convention

Accounting convention has the following importance:

  • To make it easier to compare firms with competitors by ensuring that they follow the same process.
  • To make it simple to compare financial periods.
  • To ensure that accounting bodies record transactions in a consistent manner.
  • To have a standardized and all-inclusive method for businesses to follow.


5 Basic Accounting Convention

Accounting Conventions can be categorized into the following:

  • Materiality: This states that only items with significant economic effect should be disclosed in the financial statements.

  • Conservatism: In this case, a company is expected to make provision for expenses and losses without waiting for incomes and gains.

  • Disclosure: In order to aid rational decision-making, financial statements should reveal all relevant information, even if it is detrimental to the business.

  • Consistency: To compare a company’s financial statements over time, the same accounting principle should be applied across multiple accounting cycles.

  • Prudence: This principle states that assets and income should not be overstated, while expenses and liabilities should not be understated.

10 Differences Between Accounting Concepts and Accounting Conventions

Some notable differences between accounting concepts and accounting conventions are:

  1. Accounting concepts are basically accounting assumptions followed by an accountant during the recording of transactions and in the preparation of final accounts. Meanwhile, accounting conventions are procedures and principles that are widely accepted by all accounting bodies and adopted by enterprises to serve as a guide while preparing financial statements.

  1. Accounting concepts are universal and have little chance of bias, whereas accounting conventions have a high chance of bias. This is as a result of different accounting practices that set accounting conventions within which personal judgments may be inserted.

  1. Accounting concepts are recognized by accountants and are useful while preparing financial statements. On the contrary, accounting conventions are past practices that come in handy but are still not formally recognized as standards for preparing financial statements.

  1. Accounting concepts are set by accounting bodies. Conversely, accounting conventions are discovered from common accounting practices, which are then accepted based on general agreement.

  1. Accounting concepts are part of accounting standards, but accounting conventions are not yet but may become part of the future. They have been developed to deal with changes in financial reporting.

  1. Accounting concepts are theoretical notions applied in the preparation of financial statements, while accounting conventions are laid down methods meant to give the financial statement a true and fair view.

  1. Accounting concepts may be backed by law and other governance bodies; that is, they are legally recognized and the concepts fall under the “Generally Accepted Accounting Principles” (GAAP), a standard in accounting adopted by the U.S. Securities and Exchange Commission. On the other hand, accounting conventions have no backing from governance or professional bodies.

  1. Accounting concepts are universally adopted by businesses, but accounting conventions vary by company.

  1. Accounting concepts are being used during the recording of transactions and account maintenance, whereas accounting conventions are used during the preparation and presentation of financial statements towards the end of the financial year.

  1. Accounting concepts give a fair and true insight into financial statements, seeing that the concepts are traditional procedures followed by accountants, as opposed to accounting conventions that are less restrictive and not always followed by enterprises.

In summary, accounting concepts and accounting conventions are quite similar, with the aim of improving financial statement preparation and presentation by providing guidelines for true and fair financial information. Accounting concept does not rely on accounting convention, but while preparing accounting convention, accounting concept needs to be considered.

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