Accounting Conventions

Conventions are customs that have evolved through long accounting practice, adopted for practical convenience and prudence rather than derived from a single formal rule.

• Convention of Consistency — once an accounting method is adopted (e.g. Straight Line depreciation, or FIFO for stock), it should be followed period after period; a change is permitted only for a valid reason, and must be disclosed, because switching methods freely would make year-on-year comparison meaningless.
• Convention of Conservatism (Prudence) — when there is genuine uncertainty, anticipate no profit but provide for all possible losses. This is why closing stock is valued at cost or net realisable value, whichever is lower, and why a provision for doubtful debts is created even before a debt is actually confirmed bad.
• Convention of Materiality — only items significant enough to influence a user's decision need to be disclosed with precision; trivial items (e.g. the cost of a stapler) may be written off immediately rather than tracked as an asset, since the effort of precise treatment would exceed its usefulness. …