Term: ACCOUNTING CONVENTION

These are conventions developed by the accounting profession to ensure that the financial statements display a clear and accurate picture of the progress of the business during the accounting. The purpose is to enable stakeholders to evaluate the performance of the business during the accounting period and its solvency at the end of that period. Probably the most deeply entrenched convention is the profit calculation which in simple terms subtracts the expenses of the business from its incomes in order to arrive at its profit or loss for the period. This is usually done in three stages – the trading account (where the company’s variable costs are subtracted from its turnover in order to arrive at gross profit), the profit and loss account (where the company’s fixed expenses are subtracted from the gross profit in order to arrive at the net profit) and the income statement which shows how the profits have been allocated (i.e. to taxation, minorities, director emoluments etc.). The income statement is disclosable to the public in a public company (in terms of the Companies Act) and hence contains much more information, usually given by way of a note rather than on the face of the income statement. There are many other accounting conventions which are applied in the preparation of the financial statements.

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