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edunxt smu assignments solved MB0041 & FINANCIAL AND MANAGEMENT ACCOUNTING 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. Give a small introduction on accounting conventions and elucidate all the eight accounting conventions.

AnswerAccounting Conventions: Accounting conventions are the rules based on which accounting takes place and these rules are universally accepted.
There are 10 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.

Types of accounting conventions:
1. Convention of income recognition: According to this concept, revenue is considered as being earned on the date on which it is realized, 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.

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’.

4. Convention of full disclosure:
This convention requires a business to disclose the following:
1.    All the accounting policies adopted in the preparation and presentation of financial statements.
2.    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.
3.    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’.

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. 

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