1.1.3.10 ACCOUNTING CONVENTIONS
Convention of Conservation: It is a world of uncertainity. So it is always better to
pursue the policy of playing safe. This is the principle behind the convention of
conservatism. According to this convention the accountant must be very careful while
recognising increases in an enterprise’s profits rather than recognising decreases
in profits. For this the accountants have to follow the rule, anticipate no profit, provide
for all possible losses, while recording business transactions. It is on account of this
convention that the inventory is valued `at cost or market price whichever is less’,
i.e. when the market price of the inventories has fallen below its cost price it is
shown at market price i.e. the possible loss is provided and when it is above the cost
price it is shown at cost price i.e. the anticipated profit is not recorded. It is for the
same reason that provision for bad and doubtful debts, provision for fluctuation in
investments, etc., are created. This concept affects principally the current assets.
Convention of full disclosure : The emergence of joint stock company form of
business organisation resulted in the divorce between ownership and
management. This necessitated the full disclosure of accounting information about the
enterprise to the owners and various other interested parties. Thus the convention of
full disclosure became important. By this convention it is implied that accounts must
be honestly prepared and all material information must be adequately disclosed
therein. But it does not mean that all information that someone desires are to be
disclosed in the financial statements. It only implies that there should be adequate
disclosure of information which is of considerable value to owners, investors,
creditors, Government, etc. In Sachar Committee Report (1978) it has been
emphasised that openness in company affairs is the
best way to secure responsible behaviour. It is in accordance with this
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