Accounting Conventions
Consistency
According to this concept, the same accounting method should be applied in each accounting period when preparing financial reports. This makes it easy to compare results of one period with another period and the stakeholders can get a more realistic idea about the performance of the business.
Prudence
It involves being cautious while reporting accounting information. The assets should not be overstated and the liabilities should not be understated.
This is why closing stock is always valued at the lower of cost or market value so that the profits are not overstated.
Matching Principle
This principle is based on accrual concept of accounting. It states that revenue earned during a specific period has to be matched with the expenses incurred with earning that revenue. The following point should be considered:
- If an item of revenue is shown in the Profit and Loss account, all expenses incurred on it, whether paid or not, should be shown as expenses in the Profit and Loss account.
- An expense will be recorded in the books of accounts if the revenue associated with it has not been realized.
- Incomes received in advance should not be shown in Profit and Loss account.
- All the cost and expenses incurred on good remaining unsold at end of the year must be carried forward to next year as these goods will be sold in the next accounting period.
