Accounting conventions are principles or accepted practice which apply generally to

transactions. Some conventions are of more relevance to some transactions than to

others, but all have an influence in determining:

 Which assets and liabilities are recorded on a balance sheet

 How assets and liabilities are valued
 What income and expenditure is recorded in the income statement
 At what amount income and expenditure is recorded
Accounting concepts are the broad assumptions which underline the periodic financial accounts
of business enterprises. Assumptions mean that:
- These concepts are not necessarily obvious, nor are the only concepts which could
be used, but they the ones in use currently.
- These concepts look at why certain items are treated in specific ways and
- Where there’s a choice of treatment, how to decide which treatment to use.
- National legal requirements
- National accounting standards
The International Accounting Standards (IAS) 1 – Preparation of Financial Statements lists a
number of accounting principles and conventions that must be followed when preparing financial
statements. The major accounting concepts that must be followed are:
a) Fair Presentation
b) Going Concern
c) Accruals
d) Consistency
a) Fair Presentation
Fair presentation requires the faithful representation of the effects of transactions,
other events and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses.
b) Going Concern Concept
This states that the business will continue in operational existence for the
foreseeable future, and that there is no intention to put the company into
liquidation, unless otherwise it is known.

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 c) The Accruals/Matching Concept
This states that, in computing profits, revenue earned must be matched against the
expenditure or incurred in earning it.
d) The Consistency Concept
This states that in preparing accounts consistency should be observed i.e. certain
items should be treated using different methods, the method chosen should be used
consistently from one year to the next so that reasonable conclusions can be made
on the performance of the business, for example Depreciation, Stock Valuations.
OTHER CONCEPTS
e) Prudence Concept
This states that where alternative procedures or alternative valuations, are possible,
the one selected should be the one which gives the most cautious presentation of the
business financial position or results.
f) The Business Entity Concept
This concept states that a business and the owner should be treated separately.
g) Money Measurement Concept
This states that accounts should deal only with items to which a monetary value
can be attributed.
h) The Separate Valuation Principle
This states that in determining the amount to be attributed to an asset or a liability
in the balance sheet, each component item of the asset or liability must be valued
separately.
i) The Materiality Concept
This is judgemental depending on the nature and size of the business.
A matter is material if its omission or misstatement would reasonably influence the
decisions of a user of the accounts.
j) Substance Over Form
It can happen that the legal form of a transaction can differ from its real substance,
where this happens accounting should show the transaction in accordance with its
real substance e.g. goods bought on hire purchase.

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 k) Neutrality/Objective Concept
This states that accountants should be free from bias when preparing financial
statements e.g. internally generated goodwill should not be recorded in the books
because of its uncertainty as to its true value.
l) The Accounting Period Concept
This states that there must be a standard shorter period in which to measure
performance of a business. Twelve months period is normally adopted for this
purpose. This time interval is the accounting period.
m) The Realization Concept
This states that profits are realized immediately goods or services exchange hands
whether cash has been paid or not.
n) The Historical Cost Concept
This state that assets should be recorded in the accounting books at cost i.e. price
paid to acquire it. These assets are systematically reduced by the process called
depreciation.
The Entity Concept
This concept states that a business is a separate entity or person from its owner. Like a biological
person the business can exercise rights to own assets and powers to borrow and incur liabilities.
At law the business (applied to limited liability companies) is a legal person. For accounting
purposes even an unincorporated entity is treated as a ‘person’ separate from the owner who
formed it
The implication of this concept is that assets and liabilities of the business should be kept
separate from those of its owner. The student is in the position of the accountant for the business,
not for the owner of the business. He should view the owner as if he were an out side party or
entity.
The Duality Concept
This concept states that there are two aspects to every transaction:
a) the giving aspect, which creates a liability, and
b) the receiving aspect, which creates an asset.

It is from this concept that the rule of double entry is derived.

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The rule of double entry states that for every debit entry to an account there is a corresponding
credit entry in another account. ‘Corresponding’ means of equal magnitude in value.
Consequently to post transactions to the ledger, you debit the receiving account and credit the
giving account

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Reference
Wood, F and Robinson.S.2009.Bookkeeping and Accounts.7th edition. FT Prentice Hall .U.K

Wood, F and Sangster A. 2013. Business Accounting112th edition. FT Prentice Hall. U.K

ZICA.2013.T1 Financial Accounting.2013 Edition.BPP Publication. U.K

ACCA.F3 Financial Accountiing.2015 Edition. Kaplan Publishers. U.K

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