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Accounting concepts and conventions evolved as a result of information needed by the users of accounting

information which became conflicting over time because of different methodology or procedure used in its
preparation .it was thereby adopted to ensure that accounting information is presented accurately and consistently
Accounting concepts and conventions could be defined as ground or laid down rules of accounting that should be
followed in preparation of all accounts and financial statements.
There are different kinds of accounting concepts and conventions
The concepts include
Giving the fact that a business entity is solvent and viable this concept assumes the notion that the business unit will
have a perpetual existence and will not be sold or liquidated
It supports the use of historical cost concept in measuring assets such as; supplies equipments etc. that will be used
in operation of a business. Without the Going concern concept accounts will be drawn up on a winding up basis.
This concept states that every business unit not withstanding its legal existence is treated a separate entity from the
body or bodies that owe it, this implies that its existence is distinct from its owner(s).
It records and reflects the financial activity of the specific business organization and not of its owner(s) or
employees. It is also important because it ensures that a company and its owner(s) can contract and sue each other
incase of any misunderstanding arising in the future.
This concept states that in an accounting period the earned income and the incurred cost which earned the income
should be properly matched and reported for the period. This concept is also universally accepted in Manufacturing,
Trading organization.
Points to considered when matching
1. Outstanding expenses though not paid for in cash are shown in the profit and loss accounts.
2. Prepaid expenses are not shown in profit and loss accounts
3. Income receivable should be added in the revenue
4. Income receivable in advance should be deducted from revenue
Accrual concept attempt to correctly match all the accounting expenses (cost) to income (revenue) to the time it
occurs at that accounting period. It also enables all revenue and expenditure of an accounting period to be
recognized. It helps specify the profit of the organization in the accounting period.
Realization concept encourages the periodic recognition of revenue as soon as it can be measured and the value of
the assets is reasonably certain
In realization the revenue are realized in three basis
1. Basis of cash
2. Basis of sale
3. Basis of production.
ITS importance
It encourages the recognition of transaction and profit arising from them at the point of sale or transfer of ownership
This concept implies that all assets acquired, service rendered or received, expenses incurred etc. should be recorded
in the books at the price at which it was acquired
(Its cost price). The cost is distinct from its value and the record does not signify the value. It also holds that cost is
the most reliable and verifiable value at which a good is or services should be initially recognized.
ITS importance
It allows the record of all transaction no matter how minute it may be before it might or might not be subjected to
This concept ensures that transaction are recorded in books at least in two accounts, if one account is debited its
also credited with the same amount in a different account. The recording system is also known as double entry
system. Assets = Liabilities + Capital.
This concept states that an item should not be recorded unless it can be quantified in monetary terms in other words
it specifies that accountants should not record facts that are not expressed in money terms.
ITS importance
This concept could be said to be efficient because money enables various things of diverse nature to be added
together and dealt with.
i. CONSISTENCY: It states that accounting method used in one accounting period should be the same as the
method used for events or transactions which are materially similar in other period (i.e. accounting practices should
remain unchanged from period to period ). This also involves treatment of transaction and valuation method.
Consistency is also advisable so that the comparison of accounting figures over time is meaningful. Consistency also
states that if a change becomes necessary, the change and its effect should be clearly stated.
ITS importance
As stated by D.VICTOR consistency in accounting is an important assumption that facilitates comparability for
information users. It also encourages reliability and fair presentation.
According to AMERICAN ACCOUNITNG ASSOCIATION, an item should be regarded as material if there is
reason to believe that knowledge of it would influence decision of informed investors. An item is also considered
material if its omission or misstatement could distort the financial statement such that it influences the economic
decision of users taken on the basis of financial statement.
ITS importance
It helps prevent records to be unnecessarily being over burden with minute details.
This is an accounting practice that emphasizes great care in the anticipation of possible gains while possible losses
are efficiently provided for. Prudence requires an accountant to attempt to ensure that the degree of success is not
overstated. It also makes provision for possible bad and doubtful debts out of current years profit.
ITS importance
A strict application of prudence convention would ensure that profits and assets of the firm are not overstated.
This convention states that the financial statement should be made on verifiable evidence.
ITS importance
It gives proof of a transaction in an objective manner in contrast to subjectivity or dependence on the verifiable
opinion o the accountant preparing the financial statement.
It states that information relating to the economic affairs of the enterprise which are of material interest should be
clearly disclosed to the readers.
ITS importance
it discloses sufficient information which is of material in trust to owners,present and potential creditors and
investors. It also helps the reader not to be misled in anyway by hearsay.
There are many problems arising from the application of these laid down principles. They include
i. The Problem of Objectivity: There are many aspects of accounting that ensures that objectivity cannot be
universally appliable in the peparation of accounts. e.g. the different value of the charge rate of depreciation by
ii. The Problem of Consistency: Most times because of the method employed in treating certain items may vary (i.e.
the items) from time to time making the concept of consistency to be applied more and more rigid. This problem can
also be seen in short term manipulation of reported result.
iii. Problem of materiality: In materiality deciding what is and what is not material is a problem and this concept
does not apply while recording cash transaction thereby leading to small amounts being omitted from the cash book
on the ground that they are not material.
iv. Problem of Prudence: Conservatism to an excess degree will result in the creation of secret reserves.
v. Problem of Realization: This problem arises in the case of revenue recognition and the valuation of closing stock
whereby the general principle for valuation of inventory is to take the lower of cost and realizable value. It also asks
the question at what stage can profit be deemed to have been realized?
vi. A Problem also arises where accounting concept and convention conflict with each other and one may at a time
override the application of the other. E.g. Conflict of Money Measurement and Materiality.
This arises where only items quantifiable in monetary terms are recorded but some smallish items can also be
measured thereby contradicting materiality etc.
vii. Problem of Going Concern Concepts: This arises whereby sales are made but the customers with the notion of
the perpetual existence of the firm in mind might delay the payment of the item acquired thereby leaving the firm
with no cash and this gradually leads to the dwindling of the business.
viii. Problem of Money Measurement: Transactions which cant be expressed in money terms do not find a place in
the books of account though they might be useful in business.
First let us specify the meaning of Adjustment.
Adjustments can be said to mean transactions which have not yet been journalized by the end of an accounting
period and appended to the trial balance. They are called adjustment because the transactions are incorporated by
mathematical adjustment to the figures of ledger account balances.
It also involves two kinds
Accrual Adjustment: (This is adjustment for revenue and expenses that are matched to dates before the transaction
has been recorded).
Deferrals Adjustment: (This is adjustment for revenue and expenses that are matched to date after the transactions
have been recorded)
Adjustment is vital in accounting in order to adjust expenses and revenue to the accounting period where they
actually occurred.
It is also needed so that omissions can be accounted for and errors corrected. These entries are made so that revenue
and expenses are reported in appropriate accounts with the correct amount. Adjustments are also needed to reflect
the actual value of a service/product at the end of the period.
Giving the fact that adjustments are based on reality and not on source documents, this strengthens and view its
relationship with the concept of realization, accrual etc. Adjustment entries also agrees with the objectivity
convention (which states that financial statements should be made on verifiable evidence) which can be seen as a
result of the depreciation of items as time goes on some assets will require to be adjusted, verified and accounted for
and this is done using mathematic calculation as evidence.
Adjustments also encourage accountants to be consistent in their method of recording and updating the general
ledger accounts. It is also needed to bring items such as inventory in line with physical stock counts typically held at
the end of the year.