Accounting Conventions

Lawyers working with commercial transactions, corporate finance, securities and the like often encounter and use financial terminology. For example, accounting conventions such as the historic…

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Hi, my name is Mandesa and welcome to TransLegal's lesson of the week.

Today I'm going to be talking about accounting conventions.

Now a company's accounts are supposed to present an accurate view of the company's financial position, that is, what accountants refer to as a true and fair view of the financial position of the company.

In helping accountants to determine the true and fair view of the financial position of a company certain accounting conventions have developed and accountants use these conventions in their calculations for accounting. There are many, many different accounting conventions so I will just highlight a few.

For example, the historic cost convention, which means that the value of an item is determined based on the cost of acquisition at the time of acquisition. Another convention is the going concern convention, which assumes that at the time of preparing the accounts the company intends to continue in business. A third example is the prudence convention, which means that you try to take as fair or as accurate a sum or an estimate of the cost of various assets. In other words, you err on the side of caution. Fourth, is the money measurement convention – the money measurement convention is concerned with only using those items which can be quantified so, for example, employee morale is not shown on the accounts, nor is the value of the location of the plant shown in the accounts. However, it should be noted that accounting is a living science so to say, so what can and cannot be measured according to the money measurement convention can change over time.

Thank you very much. If you have any questions please feel free to write them in the box below and either myself or one of my colleagues will be in touch with you.