Question

Accounting conventions are common guidelines and practices—principles, assumptions, and constraints—followed by accounting professionals when recording business transactions. These accounting conventions are standards used by all business organizations, so it is important to understand what they are and how to apply them.

• Periodicity assumption.
• Monetary unit assumption.

Answer 1

Periodicity assumption – As per this accounting convention an organization is required to report its financial statements within certain designated periods of time. So a company has to report its financial statements on quarterly, half-yearly and annual basis. For the purpose of comparability the time periods are kept same. For example many companies in USA report their financials ending 31^st December and hence follow a calendar year for reporting purpose. This is kept same year after year for the purpose of comparisons.

Monetary unit assumption - As per this accounting convention business transactions and events are assumed to be measured as well as expressed in terms of monetary units. The monetary units have to be stable as well as dependable. Thus, in plain simple terms, financial statements can be in dollars, euros, yen etc. as it is essential to have a monetary unit to communicate financial information in an effective manner. Any unit can be used as long as it is stable as well as dependable.