Accounting has a number of rules or concepts to have evolved over time. They have evolved as attempt to agreement with practical difficulty practised by preparers and users of financial statement rather than to reflect some theoretical ideal. In preparing the balance sheets earlier, we have followed various accounting conventions, although they have not been explicitly mentioned
The definition of accounting convention is Ground rules of accounting that should be followed in preparation of all accounts and financial statements and is designed to help accountants overcome practical problems that arise out of the preparation of financial statements.
The major rules of convention briefly described below are the most generally accepted:
Business entity convention:
Each set of accounting record should deal with a specific and identifiable business activity. It should deal with only the financial transactions, facts and events relating to that specific activity. The business entity convention must be distinguished from the legal position that may exist between businesses and their owners. For sole proprietorships and partnerships, the law does not make any distinctions between the business and owners. For the limited companies can be both an counting entity and a legal entity, provided that it is not a holding company.
Historic cost convention:
This convention holds that the cost of assets shown on the balance sheet must be based on their historic cost (that is acquisition cost). This way of measuring asset value is preferred over other methods based on some form of current value.
Many people find the historic cost convention not easy to support, as outdated historic costs that recording assets at their recent value would provide a more practical view of financial position and would be relevant for a large range of decisions. However, a system of measurement based on current values can present a number of problems.
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