What is an 'Accounting Convention'

An accounting convention consists of the guidelines that arise from the practical application of accounting principles. It is not a legally binding practice; rather, it is a generally accepted convention based on customs and designed to help accountants overcome practical problems that arise out of the preparation of financial statements. If an oversight organization, such as the Securities and Exchange Commission (SEC) or the Financial Accounting Standards Board (FASB) sets forth a guideline that addresses the same topic as the accounting convention, the accounting convention is longer applicable.

BREAKING DOWN 'Accounting Convention'

Accounting is full of assumptions, concepts, standards and conventions. Concepts such as relevance, reliability, materiality and comparability are often supported by accounting conventions that help to standardize the financial reporting process.

Examples of Accounting Conventions

Conventions are used to provide guidelines around the basic rules of accounting. The historical cost convention requires all transactions to be recorded at the original cost. Adjustments to line items are not made for inflation or market value. This means book value is often less than market value. For example, if a building costs $50,000 when it is purchased, it should remain on the books at $50,000 regardless of changes in market value. The going concern convention assumes a business will continue on for an indefinite period of time. This helps accountants to make entries that impact multiple time periods.

The accounting period convention breaks time into periods such as weeks, months, quarters and years. These periods help to report on how the company is performing on a periodic basis. The accounting entity convention applies to business owners and says personal and business records should be kept separately. Conservationism is both an accounting principal and convention. It tells accountants to err on the side of caution and conservatism when providing estimates for assets and liabilities.

One of the most important conventions is the matching convention. The matching convention tries to match revenues and expenses to the period in which they were incurred. This is accomplished through cash accounting and accrual accounting. Most companies use accrual-based accounting, which is when the matching principle is required. The cash basis of accounting matches revenue with expenses as they are paid. Under accrual accounting, a company can expense the cost of a truck over the life of the truck. In cash accounting, the company expenses the cost of the truck in the year it was paid, even though the company receives value from the truck for the next 10 years.

RELATED TERMS
  1. Convention Expenses

    Convention Expernses are any travel expenses incurred while at ...
  2. Half-Year Convention For Depreciation

    A depreciation schedule that treats all property acquired during ...
  3. Conventional Cash Flow

    Conventional cash flow is a series of inward and outward cash ...
  4. Accounting Period

    The time span in which certain financial events took place. The ...
  5. Convention Statement

    A document filed by an insurance or reinsurance company that ...
  6. Accounting Principles

    Accounting principles are the rules and guidelines that companies ...
Related Articles
  1. Personal Finance

    Conventional Mortgages and Loans

    A conventional mortgage is any type of homebuyer's load that is not offered or secured by a government entity but rather available through a private lender.
  2. Investing

    The Cost of Shale Oil Versus Conventional Oil

    Fracking technology has brought new costs to the oil extraction process, and that has an impact on the profitability of the deposits being drilled.
  3. Insights

    What if Republicans Hold a Brokered Convention?

    History shows anything can happen once the second – or 36th – ballot is cast, from a win for the front-runner to a nomination for the zero-delegate.
  4. Insights

    Democrats Received Donations From Unions and Corporations for 2016 Convention (CMCSA, FB)

    The Democratic party is a long way from its 2011 pledge to avoid corporate donations.
  5. Investing

    Why Organic Food Is So Expensive

    Discover how organic farmers face many obstacles. Learn why your organics cost so much more than conventional foods and if there is any hope for falling prices.
  6. Investing

    A Day In The Life Of An Accountant

    An analysis of the accountant profession, who becomes an accountant, what they do, where they work, and salary ranges.
  7. Investing

    The Complete Guide to Financing an Investment Property

    If you're considering adding an investment property to your portfolio, you need to know what your options are for financing its purchase.
  8. Small Business

    Best Checking Accounts For Small Businesses

    What you need to know to choose the best checking account for your small business – and where to look.
RELATED FAQS
  1. How does proration affect asset depreciation?

    Learn how different proration or applicable convention methods such as half-year, mid-quarter and mid-month affect asset ... Read Answer >>
  2. If different bond markets use different day-count conventions, how do I know which ...

    A day-count convention is a system used in the bond markets to determine the number of days between two coupon dates. This ... Read Answer >>
  3. What are the objectives of financial accounting?

    Learn about the principle objectives of financial accounting, including the furnishing of the financial statements for those ... Read Answer >>
  4. What is cost accounting?

    Learn about the main benefits of cost accounting systems, how they are different from financial accounting and why they are ... Read Answer >>
  5. What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center