- Convention of Materiality : This convention states that items of small significance need to be given strict theoretically correct treatment. The cost of recording and showing in financial statement events in business which are insignificant in nature may not be well justified by the utility derived from that information. For eg. An ordinary calculator costing Rs.100 may last for ten years. However, the effort involved in its cost over the ten year period is not worth the benefit that can be derived from this operation. When a statement of outstanding debtors is prepared for sending to top management, figures may be rounded to the nearest ten or hundred. This convention will unnecessarily over burden an accountant with mare details in case he is unable to find an objective distinction between material and immaterial evens. It should be noted that an item material to one party may be immaterial for another. Another example – After auditing, printing and circulating of the accounts to the share holders it is observed that a bill of printing and stationery amounting to Rs.100/- remained to be accounted in that relevant year, in such case if Rs.100/- is not material as compared to the profit or sales of the company than based on the convention of materiality the expense can be booked in next year and the account of last year need not be re-audited, printed and circulated, since it wont materially affect the accounts. Though this is against the concept of matching, periodicity and accrual, but this convention prevails over the concepts.
- Convention of Conservatism : This convention requires that the accountants must follow the policy of “Playing safe” while recording business transactions and events. That is why, the accountants follow the rule anticipate no profit but provide for all possible losses, while recording the business events. This rule means that an accountant should record lowest possible value for assets and revenues, and the highest possible value for liabilities & expenses. According to this concept revenues or gains should be recognized only when they are realized in form of cash or assets. Eg. Closing Stock is valued at cost or market price whichever is less. Or we make provisions for Doubtful debts in our books, these are examples of convention of conservatism..Though these are at times against the concept – of Realisation or Cost. Hence conventions at times supersedes the concepts.
- Convention of Consistency : This convention requires that once a firm decided on certain accounting policies & methods & has used these for some time it should continue to follow the same methods or procedures for all subsequent similar events & transactions unless it has a sound reason to do otherwise. Accounting practices should remain unchanged from one period to another. For eg: If depreciation is charged on fixed assets according to SLM this method should be followed year after year.