There are certain general conventions or principles which supplement the basic principles for the preparation of accounting records and financial statements. They are called modifying conventions or principles.
The important modifying principles are:
1. Cost-Benefit
2. Materiality
3. Consistency
4. Prudence or conservatism
5. Timeliness
6. Substance over legal form
7. Variation in accounting practices.
1. Cost-Benefit Principle:
This principle is a generally accepted norm that the cost of doing anything must not exceed the possible benefit that may be derived. This is applicable in the case of accounting also. Money spent for undertaking accounting work should definitely provide more benefit than the cost incurred.
2. Materiality Principle:
Materiality means relevance or importance or significance. As per this principle all material facts should be disclosed in the financial statements, but insignificant and immaterial facts need not be disclosed in details. For example, purchase of items like pen, pencil, scissors etc. are to be recorded as assets but practically these items are treated as expenses under the head stationery.
3. Consistency Principle:
Consistency means steadiness or unchanging nature. Accounting policies and practices adopted must be consistent for relatively reasonable period of time. The comparison of the financial statements of one year with that of another year will be effective and meaningful only if accounting practices and methods remain unchanged over year.
4. Conservatism or Prudence Principle This principle:
calls for losses while recording accounting information but at the same time does not permit anticipation of profits. This principle implies that while preparing financial statements all possible losses are to be provided for but incomes can be recognized only when there is certainty. It is base on the principle of prudence that stock is valued at market price or cost price whichever is les and provision is provided for doubtful debts.
5. Timeliness principle:
Timeliness implies that the financial statements are to be prepared and published in time. The relevance, dependability, and utility of the financial information depends on the timely publication of financial statements. The users of financial statements need timely information.
6. Principle of Substance over legal form:
This principle states that transactions and financial events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.
7. Variation in Accounting practices:
For the preparation of financial statements, the business enterprises are following certain specific guidelines and practices which are called generally accepted accounting principles and practices (GAAP). Certain industries may sometimes deviate from GAAP because of the peculiarity of its operation and practices.
