Accounting Concept vs. Accounting Convention: What's the Difference?
Edited by Aimie Carlson || By Harlon Moss || Updated on October 6, 2023
Accounting Concept refers to the foundational ideas behind financial reporting, while Accounting Convention means established practices that guide accountants' actions.
Key Differences
Accounting Concept and Accounting Convention are two fundamental terms in the accounting domain. The Accounting Concept refers to the basic theoretical ideas and principles that form the backbone of accounting. These concepts act as the foundation upon which the entire structure of accounting is built. For example, concepts such as the money measurement concept or the going concern concept are essential for understanding why and how certain transactions are recorded.
Accounting Convention, on the other hand, pertains to the customary and traditional practices which the accounting community adopts over time. While Accounting Concept offers the theoretical groundwork, Accounting Convention provides practical guidelines that help accountants in the real-world application of these concepts. These conventions have evolved based on convenience, usage, and to some extent, practical challenges.
One could say that while the Accounting Concept is like the theoretical knowledge one gains from textbooks, the Accounting Convention is more like the wisdom one gains from practical experience. Both are indispensable to the profession. For instance, while an Accounting Concept may state that financial statements should reflect a true and fair view, the Accounting Convention might dictate specific ways or methods to achieve that, like the conventions of consistency or materiality.
Another interesting difference is that while Accounting Concepts tend to be more stable and less prone to change, Accounting Conventions can evolve over time based on changing business environments, technological advances, and shifting regulatory landscapes. It is crucial to understand that both Accounting Concept and Accounting Convention work in tandem to ensure that accounting as a discipline remains both theoretically sound and practically relevant.
Comparison Chart
Nature
Theoretical principles
Practical guidelines
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Stability
More stable and foundational
Can evolve over time
Source of Evolution
Fundamental accounting principles
Based on tradition, practice, and experience
Purpose
Provides the basis for financial recording
Ensures real-world applicability of concepts
Example
Going concern concept (assumption that business will continue)
Convention of conservatism (understate income, overstate cost)
Accounting Concept and Accounting Convention Definitions
Accounting Concept
The basic theoretical ideas underpinning financial reporting.
The accrual Accounting Concept ensures revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
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Accounting Convention
Established traditions adopted by the accounting community.
The Accounting Convention of consistency ensures that financial statements across periods can be compared with ease.
Accounting Concept
The foundation on which accounting practices and procedures are built.
Due to the going concern Accounting Concept, businesses assume they will continue operations indefinitely.
Accounting Convention
The practices and procedures that evolve based on practical challenges and needs.
The Accounting Convention of full disclosure ensures that companies present a comprehensive picture of their financial health.
Accounting Concept
An underlying notion guiding the preparation and presentation of financial statements.
The materiality Accounting Concept dictates that all significant information should be reported in financial statements.
Accounting Convention
Accepted norms ensuring the real-world applicability of accounting concepts.
The disclosure Accounting Convention mandates the sharing of all essential information in the financial statements.
Accounting Concept
Rules that dictate the framework for financial accounting.
The consistency Accounting Concept implies that the same accounting methods should be used from one period to the next.
Accounting Convention
Customary practices guiding the application of accounting principles.
Due to the Accounting Convention of materiality, minor expenses might be ignored if they don’t significantly impact the financial statements.
Accounting Concept
A fundamental principle that governs the accounting practices.
The double-entry system is based on the Accounting Concept of every transaction having a two-fold effect.
Accounting Convention
Practical guidelines derived from long-standing practices in accounting.
The Accounting Convention of conservatism leads to a cautious approach when there's uncertainty about income or expenses.
FAQs
What is the Accounting Concept?
Accounting Concept refers to the foundational theoretical principles of accounting.
How is the Accounting Convention different from Accounting Concept?
Accounting Convention pertains to established practices, while Accounting Concept concerns theoretical principles.
Why are Accounting Conventions important?
Accounting Conventions ensure the practical applicability and consistency of accounting practices.
Are Accounting Concepts universal?
While many concepts are globally recognized, specific interpretations might differ based on accounting standards.
Can Accounting Conventions change?
Yes, conventions can evolve over time based on practices, business environments, and regulatory changes.
Does every business follow the same Accounting Concepts?
While core concepts are widely accepted, their application may vary based on business type and local regulations.
Are Accounting Concepts and Conventions legally binding?
Concepts provide the foundation, but it's the accounting standards, influenced by conventions, that often have legal backing.
How do Accounting Conventions support Accounting Concepts?
Conventions provide the practical guidelines to ensure the real-world applicability of foundational concepts.
Are new Accounting Concepts introduced often?
New concepts are rare, but interpretations and applications can evolve based on changing business and economic landscapes.
Can businesses choose which Accounting Convention to follow?
While there's flexibility in some conventions, consistent application is crucial for true and fair financial reporting.
Which holds more weight, Accounting Concept or Accounting Convention?
Both are essential; concepts provide the theoretical foundation, while conventions ensure their practical application.
Can a business ignore an Accounting Convention?
While some conventions offer flexibility, consistently ignoring them might result in misrepresentation in financial statements.
What's an example of an Accounting Convention in practice?
The convention of conservatism, which recommends understating income and overstating expenses when in doubt.
What happens if Accounting Concepts are ignored?
Ignoring concepts can result in inaccurate financial reporting and misrepresentation of a business's financial health.
Which is more rigid, Accounting Concept or Accounting Convention?
Accounting Concepts tend to be more stable, while Conventions can adapt more to changing environments.
Is understanding both Accounting Concept and Accounting Convention crucial for accountants?
Absolutely, understanding both ensures sound theoretical knowledge and effective practical application in accounting.
Why is the consistency Accounting Concept crucial?
It ensures financial statements remain comparable across different periods.
Do all accountants follow the same Accounting Conventions?
While many conventions are globally recognized, local practices and regulatory nuances can lead to variations.
Why are Accounting Conventions considered practical guidelines?
They have evolved from real-world accounting practices and experiences, addressing practical challenges.
How do Accounting Concepts affect financial reporting?
They provide the foundational rules and principles that guide how financial transactions are recorded and presented.
About Author
Written by
Harlon MossHarlon is a seasoned quality moderator and accomplished content writer for Difference Wiki. An alumnus of the prestigious University of California, he earned his degree in Computer Science. Leveraging his academic background, Harlon brings a meticulous and informed perspective to his work, ensuring content accuracy and excellence.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
