Introduction on Several Conventions of Contemporary Accounting

Abstract. Accounting conventions are concepts and rules which have been generally accepted in performing accounting. It came from a careful observation of accounting practice， the accounting practice revealed patterns of consistent behavior.

Keywords： the entity convention； going convention； money convention； conservatism； objectivity

Accounting is a process of recording， classifying， summa rizing， and interpreting of those business activities that can be expressed in monetary terms. Accounting conventions are concepts and rules which have been generally accepted in performing accounting. The existence of conventions was not generally recognized by accountants until the 20th century. They were developed to aid accountants in judgment and estimation in order to limit likely differences in recording similar events by different accountants. The principal conventions of contemporary accounting will be discussed.

The entity convention. Contemporary accounting divides the community into separate units called "accounting entities". For each accounting entity a self-contained， double-entry accounting system is employed. Transactions between accounting entities are recorded in the accounts of both entities. Each accounting entity interprets transactions from its own viewpoint. For example， the same transaction may be recorded as a sale by one accounting entity and as purchase by another. Similar]y， one accounting entity may record a transaction as an investment， while the other accounting entity may record it as a capital contribution.

In any particular case the identification of the accounting entity may be difficult. If a department has its own accounting system and records transactions with other departments， then it is an entity for accounting purposes. If it has no such records， then it is not an accounting entity. The accounting entity is， therefore， identified as the smallest unit of activity with a self-contained accounting system.

The going concern convention. Contemporary accounting assumes that the entity will remain for the foreseeable future. This assumption is known as the "going concern" or continuity convention. It also assumes that it will continue in the same lines of business as those in which it is currently involved. The assumption of continuity is made in the absence of evidence to the contrary. In other words， when it is clear that an assumption of continued existence would result in misleading financial reports， then the assumption is not made. A major problem facing the accounting profession is in identifying the circumstances under which the continuity assumption should be abandoned. Sometimes company failures occur with the accounting reports continuing to be based upon the going concern convention. These accounting reports are subsequently criticized as misleading ..Authoritative guidelines are needed in this area if continuity is to remain a basic assumption of contemporary accounting.

The money convention. In contemporary accounting， an entity's transactions are recorded in the accounts in the monetary unit of the country in which it is operating. The use of money as the unit of account is accepted today without question， but the use of money as a unit of account does create some difficulties. The first， transactions must be expressed in money terms before they can be recorded in the accounts. In some cases transactions or events may not have an obvious money amount. The second，difficulty associated with the monetary convention is that the value of money is that the value of money is not constant over time. Its purchasing power changes as a result of either inflation or deflation. Accountants conventionally choose to ignore the changes in the purchasing power of money in the accounts.

The convention of conservatism. It is a characteristic of contemporary accounting that accountants act conservatively or prudently in the measurement of profit. This means that accountants use 'reasonable pessimism，' in measuring revenues and expenses.Revenues are not recorded until they are reasonably certain， but expenses are recorded as soon as they become probable. Similarly when accountants have a choice of measurements of cost for assets and liabilities， they will choose the lowest for assets and the highest for liabilities. The effect of this convention is that reported profits and net assets will be lower than the real. There are several possible explanations for the convention of conservatism. One is that it is the role of accountants， to curb the optimism of management. Accountants are seen as a sobering influence， forcing management to assess proposals and expectations in a realistic way to minimize errors arising from over-optimism.

A second explanation is that conservatism is a natural reaction to uncertainty. As students will behave conservatively and publicly '' choose a modest expectation of an exam result even though they may think that they have a good chance for a high grade， accountants faced with uncertainty about future events also behave conservatively.

A third explanation is that statement users may prefer conservatism to any alternative policy. Given that profit measurement depends upon estimates， conservatism ensures that the actual profit must be at least as high as the reported profit. Conservatism allows confidence in the published reports. Whatever profits and net assets may be， they will not be less than those disclosed in the published accounts.

The objectivity convention. Where an accountant has a choice of measurement the most objective will be preferred .An accountant will avoid incorporating guesses or estimates in the accounting records and reports. In practical terms， objectivity means that an accountant requires evidence of the existence and the amount of a transaction before recording it in the books. For many transactions the evidence is documentary， for example， invoices， receipts， cash register tapes and credit notes. The documentary evidence is the stimulus for recording transactions. Accountants prefer objectivity for two reasons. First， it makes the accountants' job easier. Second， reliance upon documentary evidence and generally accept procedures provides accountants with some support if their professional competence is questioned. It is a more convincing defense to produce evidence to support accounting records.