Page 34 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes 1. Convention of Consistency: The nature of recording the transactions should not be changed
at any cause or moment. It should be maintained throughout the life period of the fi rm.
If a firm follows the straight line method of charging the depreciation since its inception

should be followed without any change. The firm should not alter the method of charging

the depreciation from one method to another. The change cannot be entertained. If any
change has to be incorporated, the valid reason for change should be emphasized.
2. Convention of Conservatism: The conservatism wont give any emphasis on the anticipation
of the firm, instead it gives paramount importance to all possible uneventualities of the

firm without considering the future profi ts.

The most important of the rule of guidance at the moment of valuing the stock is as
follows:

Stock of the goods should be valued either market price or cost whichever is lower to
anticipate the future losses due to default in the payments of the customers

This provision is created for bad and doubtful debts of the firm in order to meet the losses
expected out of the defaulters.
According to this convention, the entire status of the firm should be highlighted/presented

in detail without hiding anything; which has to furnish the required information to various
parties involved in the process of the fi rm.
3. Convention of Disclosure: Convention of disclosure requires that all material and relevant
facts concerning financial statements should be fully disclosed. Full disclosure means that

there should be full, fair and adequate disclosure of accounting information. Adequate

means sufficient set of information to be disclosed. Fair indicates an equitable treatment
of users. Full refers to complete and detailed presentation of information. Thus, the
convention of disclosure suggests that every financial statement should fully disclose all

relevant information.

Example: Let us take the example of business.
The business provides financial information to all interested parties like investors, lenders,

creditors, shareholders etc. The shareholder would like to know profitability of the fi rm
while the creditor would like to know the solvency of the business. In the same way, other

parties would be interested in the financial information according to their objectives. This

is possible if financial statement discloses all relevant information in full, fair and adequate
manner.

If the financial information is complete, then only it is possible for different parties to use
that information in the required manner.
Similarly, if there is a change in accounting methods of providing depreciation on fi xed
assets, or in the methods of valuation of stock or in making provision for doubtful debts,
these should be clearly shown in the Balance Sheet by way of notes. In short, we can say
that all important facts are to be fully disclosed, otherwise fi nancial statements would be
incomplete, unreliable and misleading.

4. Convention of Materiality: The convention of materiality states that, to make fi nancial
statements meaningful, only material fact i.e. important and relevant information should
be supplied to the users of accounting information. The question that arises here is what
a material fact is. Information is material if its omission or misstatement could infl uence

the economic decision of users taken on the basis of the financial statements. Materiality
depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement. Thus, materiality provides a threshold or cut-off point rather

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