Accounting has a central place to occupy, whether it is a common home, government, or a business enterprise. Accounting ensures the prevention of fraud and illegal practices and traces the losses well. Accounting concepts and conventions are two accounting principles based on which accounting happens.
Accounting Concept vs Accounting Convention
The main difference between accounting concepts and conventions is that accounting concepts are legally compulsory in recording transactions and maintaining books of accounts. In contrast, accounting conventions are non-binding principles used in making financial statements.
Accounting concepts are the assumptions that provide the basis for accounting for transactions. The scope of personal values or bias is absent in the case of accounting concepts. In all businesses, the very same accounting concepts are applied.
Accounting conventions are guidelines that accountants adhere to due to standard practice or consensus. These are not used uniformly in all enterprises and are open to personal values or bias.
Comparison Table Between Accounting Concept and Accounting Convention
|Parameters of Comparison||Accounting Concept||Accounting Convention|
|Legal status||Accounting concepts are legally backed, hence, are compulsory to be applied formally||Accounting conventions are unwritten informal methods, hence, not obliged by governing bodies to be followed|
|Uniformity||Uniform accounting concepts are applied all across the business enterprises||Uniformity lacks accounting conventions across enterprises as these are used differently by different enterprises.|
|Usage||Accounting principles are used to keep track of records and balance books.||Accounting conventions are employed while inferencing financial statements from the given recorded transactions like profit and loss account, balance sheet, income statement|
|Mutual reliability||While applying accounting concepts, accounting conventions are not needed at all||Accounting concepts are a primary material for applying accounting conventions|
|Significance||Accounting concepts are more important accounting principles than accounting conventions||Accounting standards are, however, not as significant as accounting concepts.|
|Personal bias||No scope exists for personal bias or values while employing accounting concepts||Accounting conventions are open to personal bias or values|
|Examples||Business entity concept, money measurement concept, going concern concept, realization concept, dual concept, accounting period concept, cost concept||Full disclosure, consistency, materiality, conservatism|
What is Accounting Concept?
Accounting concepts are accounting principles that provide the basis for all the transactions to be recorded and keeping books of accounts. These have legal acceptance standardized by the governing accounting bodies and law. These are well-written and well-recognized formal concepts that are compulsory for accounting.
Because of the formal-legal backing and standardization by accounting bodies, accounting concepts are of a uniform nature and are applied uniformly across all business enterprises. No difference exists in the accounting concepts of one business enterprise compared to others. For example, the accounting concept of the dual concept, which characterizes transactions as having a dual aspect of credit and liability or payer and payee, is found uniformly in all business enterprises.
Independent of accounting conventions, accounting concepts are not being used per generally recognised accounting practices. Therefore, accounting concepts are more significant than accounting conventions. Moreover, there is no scope for personal bias as accounting concepts are legally-backed-standardized-formal rules.
What is Accounting Convention?
Accounting conventions are accounting principles having no legal obligation to be applied while accounting. Accounting norms have evolved and have established a standard in the accounting industry. These conventions were developed to handle the changes in the financial reporting landscape. These are used because of the mutual consensus among the accountants with no formal legal backing.
The nature of accounting conventions is inferential, which needs accounting concepts to be applied on the first basis for accounting conventions to be applied. Accounting conventions do not exist in a vacuum, separate from accounting ideas. As a result, accounting standards have given way to accounting concepts.
There lies no uniformity while applying accounting conventions across business enterprises. For instance, the accounting convention of full disclosure calls for providing important information to the enterprise’s shareholders. However, which information is important and which is not differs for different accountants. Therefore, there is a huge scope for personal bias or judgment when applying accounting conventions.
Accounting conventions are used while giving financial statements, in preparing a balance sheet, profit and loss account, income statement, and position statement. Moreover, four accounting conventions exist in the accounting world: full disclosure, consistency, materiality, and conservatism.
Main Differences Between Accounting Concept and Accounting Convention
- Accounting concepts are legally obliged-standardized-formally written accounting principles. On the other hand, accounting conventions are non-legal-informal accounting principles that are applied due to the custom and consensus among the accountants.
- Accounting concepts exist independently of the accounting conventions, whereas accounting conventions need to be applied in the view of accounting concepts. Therefore, accounting concepts are more significant than accounting conventions.
- Accounting concepts are employed uniformly across all business enterprises. However, the application of accounting conventions is different in different enterprises.
- There exists no scope for the intrusion of personal bias or judgment on the part of accountants while using accounting concepts. However, the application of accounting conventions is open to individual preferences.
- Accounting concepts are used while recording transactions and keeping account books, and accounting conventions are used in making financial statements, balance sheets, income statements, etc.
To sum up, accounting concepts and conventions may appear to be somewhat the same accounting principles, but there lies a huge difference. Both are different in their area of usage, legal position, uniformity in usage, mutual reliability, and personal bias scope. Therefore, learning the differences between them becomes of utmost importance while accounting.
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