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Assignment_MB0041_Fall 2013 Q1. Inventory in a business is valued at the end of an accounting period, at either cost or market price, whichever is lower. This is accepted convention or a practice in accounting.

Answer: Accounting Conventions: Accounting conventions are the rules based on which accounting takes place and these rules are universally accepted. There are ten types of accounting conventions, namely convention of income recognition, convention of expense, convention of matching cost and revenue, convention of historical cost, convention of full disclosure, convention of double aspect, convention of modifying, convention of materiality, convention of consistency, and convention of conservatism. They are
explained briefly in the following sections.
1. Convention of income recognition
According to this concept, revenue is considered as being earned on the date on which it is realised, i.e., the date on which goods and services are transferred to customers for cash or for promise.
2. Convention of matching cost and revenue
According to this concept, revenue earned during a period is compared with the expenditure incurred to earn that income, irrespective of whether the expenditure is paid during that period or not. This is also called matching cost and revenue principle.
While preparing the final accounts, adjustments are made for outstanding expenses, prepaid expenses, outstanding income, and income received in advance.
3. Convention of historical costs
This convention says that all transactions must be recorded at a value at which they were incurred. Such a value is called ‘Historical Cost’ and this principle is called the Convention of ‘Cost’. An asset or transaction may have many other values associated with it like market value or replacement cost. But all assets are recorded at the cost of acquisition and this cost is the basis for all subsequent accounting for the assets. The expenses and the goods purchased are shown at the value at which they are incurred.
4. Convention of full disclosure
This convention requires a business to disclose the following:
? All the accounting policies adopted in the preparation and presentation of financial statements.
? If there is any change in the accounting policies in the current year as compared to the previous year/s, the effects of such changes and the reason/s thereof.
? The implications (in terms of money value) on the financial statements due to such change.
5. Convention of double aspect
This concept states that every transaction has two aspects. One is the receiving aspect and the other is the giving aspect. In accounting language, these two aspects are called ‘debit’ and ‘credit’.
The claims on assets will always be equal to the assets. The claims on assets may be of the owners or of the outsiders (creditors). While the claims of owners are called Equity or Capital, the claims of outsiders are called Liabilities. Therefore, total liabilities are equal to total assets. This concept gives rise to the balance sheet equation, i.e., Assets=Liabilities + Capital.
6. Convention of materiality
This convention states that the benefit derived from measuring, recording, and processing a transaction should justify the cost of doing it.
7. Convention of consistency
This convention requires that the accounting policies must be consistently applied year after year. Consistency is required to help comparison of financial data from one period to another. Once a method of accounting is adopted, it should not be changed. A change in an accounting policy may be done only when:
? It is required by law
? It is felt that the new policy reflects the financial performance or position better than the old policy
Such changed policy must be consistently applied for the subsequent periods. As stated under the full disclosure convention, the change in the accounting policy along with the reason/s and the financial implications on the financial statements should be disclosed to the users.
8. Convention of conservatism or prudence
Accountants follow the rule “anticipate no profits but provide for all anticipated losses“. Whenever loss is anticipated, sufficient provisions should be made. But if a profit is anticipated, it should not be recorded until it is actually realised.


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