The formation of final accounts is very important in business. So while preparing the profit and loss account and balance sheet the following Accounting conventions should be taken care-
(1) Disclosure- The disclosure of Accounting principles means the accounts of business should be prepared so honestly that all the important informations related to them should be disclosed. Now-a-days mostly the business are conducted through company management as Representative management system in the world. The importance of this rule has much increased because now the capital and the management are two different things. The persons who conduct the business have no direct interest in business and if they have, it is very low. So it is essential that the owners, shareholders, creditors, government and other concerned parties should get all detailed information from these
Accounts in business. Seeing the disclosure system in company law there are many provisions in the preparation of final accounts and its presentation. An authentic format has been decided of balance sheet; and a list of contents has also been decided of the profit and loss accounts. These formats are made in this way that all the relevant facts are easily disclosed.
Some people take disclosure in this meaning that the informations based on guessing are also included in Accounting statements, but this concept is wrong. Disclosure only indicates that all those facts, related to accounting statements should be disclosed properly, in which the owners of business, present and future lenders, investors, creditors.etc. have interest. For this all those important informations which are not included in accounting statements should be shown as notes or comments.
(2) Materiality- Preparing the accounting statements it should be taken care that the difference has been made between the important and the unimportant facts. If the informations are given in so detail that to read them and to get a result becomes a wastage of time, it cannot be said right.
So the system of materiality indicates to this thing that all the informations related to accounting statements should be presented in the form of gist.
While accounting it should be observed that there is no increment in burden on Accounting Principles due to unimportant small statements. For example there are many a things in business which help in conducting the business and according to rule they are called assets. Every year while accounting we have to make an account of depreciation in assets. Now suppose if some pencils are purchased it will be a purchase of assets. After the accounting period if we count that what is the quantity of depreciation in these pencils then it will be useless because it has no important effect on business. So these types of immaterial facts should not be taken care and their purchase price should be considered as expenditure.
Any item is material or not, it depends on this that it affects to the interest of any party which has interest in accounting statements. According to the rule of materiality, either the immaterial items are left or they are mixed with other items. It should also keep in mind that any item which is immaterial in a business, may be material in some other business. So its decision should be taken judiciously seeing the position of business.
(3) Consistency- The convention of consistency in
Accounting Principle is based on this that there should be consistency in accounting practices in different Accounting periods in business so that the mutual comparison of accounting statements of various years can be done easily.
But it does not mean that the flexibility of accounting principles is finished. The changes can be done in accounting practices to à certain limit on need, but in that position all these changes should be explained clearly with accounting statements.
The convention of consistency is more important
when there are various optional methods of the same kind of practices related to Accounting principles. Then following this convention we should use only one option for all the accounting periods. For example, there are many methods of depreciation of fixed assets, we should choose anyone method among these and then the accounts should be prepared for different years by the same method making write off the depreciation. In this way during making provision fornthe doubtful responsibilities accounting should be based on the same basis in following years as it was in the starting.