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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Accounting Convention

What it is:

Accounting conventions are standards, customs or guidelines regarding the application of accounting rules.

How it works (Example):

There are four widely recognized accounting conventions that guide accountants:
1.  Be conservative. In other words, play it safe.
2.  Disclose in full.
3.  Be consistent. In other words, use the same method for calculating and reporting similar events.
4.  Report everything that is important. This is also known as the materiality convention. In other words, an item or event is material (and thus should be disclosed) if knowledge of the event or item might reasonably influence the users of the financial statements.

Generally Accepted Accounting Principles, known as GAAP, are updated regularly, reflect the latest accounting conventions and specific rules, and are the definitive source of accounting guidelines that companies rely on when preparing their financial statements. The standards are established and administered by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB).

Why it Matters:

Accounting conventions provide a standardized methodology that creates a reliable means of comparing financial results from industry to industry and from year to year. Accordingly, accounting conventions govern how companies and people prepare quarterly balance sheets or income statements, 10-Q filings, or annual reports. However, specific GAAP rules are sometimes subject to different interpretations, and unscrupulous companies can find a way to bend or manipulate them to their advantage.

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