Fairfield Institute of Management and Technology

Accounting Convention - Consistency & Materiality

Subject Name: FINANCIAL ACCOUNTING

Subject Code:101

Submitted to: Submitted by:

Name of the Faculty Name: ANURAG SINGH

MS. CHAHAT WADHWA Enrollment no:05090188821

Course: BCOM(HONS.)
Semester: FIRST SEMESTER
 CONTENT

• INTRODUCTION
• OBJECTIVE
• ACCOUNTING CONVENTION OF MATERIALITY
• ACCOUNTING CONVENTION OF CONSISTENCY
• CONCLUSION
• BIBLOGRAPHY
 INTRODUCTION

Accounting conventions are guidelines used to help companies determine how to record
certain business transactions that have not yet been fully addressed by accounting standards.
These procedures and principles are not legally binding but are generally accepted by
accounting bodies.
 OBJECTIVE

The convention of consistency provides that the business shall follow the same accounting
principles and methods for upcoming accounting periods. Consistency helps the users of
accounting to make conclusions and draw comparisons between financial statements of
different accounting periods.

The convention of materiality enables users to disregard all events that are incompatible or
immaterial objects. For example, many companies publish their financial statements in
circular figures and omit paise, and such omissions are insignificant or insignificant when
the figures are in crores or lakhs.
 ACCOUNTING CONVENTION OF MATERIALITY

Convention of materiality states that items of small significance need not to be given strict
theoretically correct treatment. There are many events in business which are insignificant in
nature. Moreover, it is one of the most important accounting convention.
The cost of recording and showing in financial statement such events may not be well justified
by the utility derived from that information. This convention unnecessarily burdens the
accountants in case they are not able to distinguish between material and immaterial events.
The most important to note is that an item for a party can be immaterial however for another
a material item.

There are no hard and fast rules in order to differentiate between material and immaterial item.
It is just a matter of judgement and some common sense. While following the convention of
materiality, keep in mind the full disclosure concept.

MATERIALITY CONVENTION EXAMPLE

Suppose a calculator used in business costing Rs 100 can be utilize for say next 8 years.
However, the effort in order to allocate its cost over the eight year period is not worth the
benefit in comparison to the benefit derive from its operation. So, treat the expense of
calculator in the year it was purchased.
 ACCOUNTING CONVENTION OF CONSISTENCY

Convention of consistency means to use the same accounting methods for making financial
statement in different years. When we use same accounting methods, it is easy for us to
compare the financial statements of different years.

CONSISTENCY CONVENTION EXAMPLE

There are many inventory valuation methods like LIFO, FIFO and average cost method. If
you will use same method of inventory valuation of inventory, it will be very good for
comparing the financial statement of two or more years. Closing stock affects both profit and
loss account and balance sheet. If there will be consistence in its valuation, we can analyze
our financial statement very with accuracy.

Above is just example, when you do your accounting practice, you should use so many
accounting procedures and methods, all should be consistent. If you do any change in your
accounting tradition, you have to disclose it in the footnote of your financial statement. For
example, you have used fixed installment method of depreciation for 10 years, if you applied
diminishing method of depreciation in these years, you should disclose this fact in the
footnote of your financial statement.

There are two benefits of this. One is with this; management can compare different year's
financial statement correctly. Second, we can compare our business's financial statement
with other business's financial statement if we know our current methods of accounting
which has been used for preparing financial statement.
 CONCLUSION

An Accountant should have clear concept on accounting concept that may help to recognize
the income and expenses. A clear understanding on accounting concepts may help to an
accountant producing a reliable financial report.
 BIBLOGRAPHY

BOOK: FINANCIAL ACCOUNTING

AUTHOR: J.R. MONGA

http://www.svtuition.org/2012/07/convention-of-consistency.html
https://www.cashstock.in/what-is-convention-of-materiality/