Page 15 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 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 firm.

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 firm
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 fixed
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 financial statements would be
incomplete, unreliable and misleading.
4. Convention of Materiality: The convention of materiality states that, to make financial
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 influence
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
than being a primary qualitative characteristic which information must have if it is to be
useful.

Example: A businessman starts a textile mill. Take only two items weaving machine
and bulbs for light in the office. He will purchase these items for his business. From the accounting
point of view, weaving machine is more important than bulbs. Therefore, distributing the cost
of machine over various years is important. But, it is not so important to distribute the cost of
bulbs. If an accountant starts keeping the details of each bulb, then his work would be unduly
burdened with every small detail. It is also not useful for the businessman to know every small
details since it does not affect the financial position in any significant manner.

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