ACCOUNTING CONVENTIONS - Accounts and Finance for Managers

Accounting conventions are bearing the practical considerations in recording the transactions of the business enterprise in systematic manner.

  • Convention of consistency
  • Convention of conservatism
  • Convention of disclosure

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.

Convention of conservatism

The conservatism won't 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.

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.

Convention of disclosure Financial Accounting

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 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.

Persons of Nature

Persons who are nothing but outcome of nature i.e., almighty.

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.

Persons of representations

This classification represents amount outstanding or prepaid in connection with the individual transactions.

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.

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.

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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