The various conventions followed in accountancy are:
Convention of conservatism:
This is the policy of playing safe. It takes into consideration all prospective losses but leaves all prospective profits. Valuation of stock is done at market price or cost price whichever is less. making provision for doubtful debts and provision for discount on debtors in anticipation of bad debt and discount are the examples of this convention.
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ADVERTISEMENTS:
The main aim of this convention is to show the profit as minimum as possible.
Convention of materiality:
This convention says that while recording transactions, a distinction should be made between material and immaterial matters. Insignificant and minor items may be merged with some other items. For example, there is no point in having separate accounts for all expenses (e.g. various items of stationery) of a business, small expenses of like nature may be combined under one general heading.
Explain the convention of consistency:
ADVERTISEMENTS:
The usefulness of accounting data increases manifold when it is comparable. Within the business over a number of years and outside the business with other organisations carrying on a similar business. This requires that accounting practices and methods should remain consistent over time. For example, same method of providing depreciation should be followed for all years. Similarly same method should be used for the valuation of closing stock, otherwise the results would be misleading. But that does not mean that improved techniques of accounting are not ruled out. If there is a good reason for change it should be introduced.
Convention of disclosure:
Accounting records are meant for use. They must be prepared honesty and scrupulously and no material information which should be disclosed, must be withheld, otherwise they will be incomplete and unreliable and there will be credibility gap, full disclosure of all material facts has become particularly important in use of joint stock company in which there is separation between management and ownership. The Companies Act, 1956 has taken sufficient precaution in this regard. This is in keeping with the latest trend of treating financial statements as a means of conveying and not concealing information.