Accountancy: Significance of Convention of Materiality and Conservatism (For CBSE, ICSE, IAS, NET, NRA 2022)

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It requires all material and relevant facts concerning financial statements should be fully disclosed. Disclosure means there should be full, fair and adequate disclosure of accounting information. Adequate means sufficient set of information to disclose. Fair indicates an equitable treatment of users.

Full refers to complete and detailed presentation of information.

Significance

  • It helps in meaningful comparison of financial statements of different business units.
  • This can help in comparison of financial statements of different years of business unit.
  • Convention is great help to investor and shareholder for making investment decisions.
  • Convention of full disclosure presents reliable information.

Convention of Materiality

The convention of materiality states that, to make financial statements meaningful, only material fact. The materiality of a fact depends on its nature and the amount involved. Material fact means information of which will influence the decision of its user.

Significance

  • Helps in minimizing errors in calculation.
  • Helps in making financial statements more meaningful.
  • Saves time and resources.

Convention of Conservatism

“Anticipate no profit but provide for all possible losses” it is principle of this convection. It provides guidance for recording transactions in accounts. It is based on policy of playing safe in regard to showing profit. Main objective of this convention is to show minimum profit. Profit should not be overstated. It clearly states that profit should not be recorded until it is realized. If business anticipates any loss in near future, provision should be made in books of accounts for same.

Significance

  • Helps in ascertaining actual profit.
  • It is useful in situation of uncertainties and doubts.
  • Helps in maintaining capital of enterprise.

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    International Accounting Standards aim at comparing businesses around the world being issued by the International Accounting Standards Board (IASB) . International Financial Reporting Standards (IFRS) replaced International Accounting Standards in 2001. IASB is an independent international standard-setting body based in London.

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