Date: 15 November 2001
Subject: need for help [Accounting Concepts]

Hello Duncan,

Thank you for all that you have done for us as far as education is concerned. I am a student persuing a Bachelor's degree in commerce.

Could you please give me help in answering the question

"Discuss financial accounting conventions as filters in sellecting, proccessing and communicting decision relevant information."

I am XXX
Email: XXX@yahoo.co.uk Thanks

Date: 17 November 2001
Subject: Re: need for help [Accounting Concepts]

Sorry but I'm not quite sure whether Ngaada or Justus is your first name.

Obviously, I won't try to give you the full answer to your assignment otherwise your lecturer would be furious with both of us. However, here are just a few pointers of what I think you need to spell out; and forgive me as I use conventions and concepts as synonyms.

Firstly, Accounting Conventions (or concepts) have been developed by accountants in an organic way to help all accountants deal with similar situations in predictable ways. That is, all accountants will deal with sales revenues in the same way (cost concept, realisation concept, materiality concept, accruals and matching concepts and so on), they will deal with depreciation in the same way and with, for example, bad debts write offs in the same way.

Hence, the first objective of accounting conventions is to provide accountants, bookkeepers and users of financial statements with the certainty that every entry is consistently treated whoever it is that records the event or transaction and under any circumstances.

In terms of filtering information, the conventions have at least two useful aspects to them that help accountants and users: the cost concept says that an event is only an accounting transaction if it has monetary value or can be translated into monetary value. Hence, something that happens that has no monetary value attachable to it is of no direct interest to the accountant and can be ignored as far as financial statements and information are concerned. Secondly, the materiality concept filters out of accounting statements by ignoring, effectively deleting, amounts that can be considered trivial. An example of the application of the materiality concept would be where there is a cost or revenue item that is not one that has arisen as part of the normal business of the entity. In this case, there is no need to set up a separate reporting segment for it: the amount we are dealing with here can simply be added to total sales without worrying about fogging the issues with a separate report, separate accounts in the ledgers and so on.

In terms of communication of decision relevant information, the conventions provide the certainty I mentioned, they provide the filtering just discussed and they assist with communication in the way that users can be sure that accounting statements are consistent from period to period, all concepts must have been properly and fully applied OR exceptions must have been highlighted. Only accounting relevant information is included in the accounting statements. This latter point can lead to a weakness of accounting statements in that non financial managers need to manage their operations both in terms of financial and non financial indicators (sometimes called metrics these days). Activity Based Costing was born out of the need for managers to combine accounting information provided by the accountant with information that they could better relate to: production information relating to their inputs, processes and outputs. To this end, the accountant needs to work closely and in harmony with his managerial colleagues in providing decision relevant information.

Other aspects you need to consider in your answer includes

• the number of words you are limited to: if it's not many, I have given you the bare bones of a good answer; if it's, say, 2,000 words then you need to go to my web site (www.duncanwil.co.uk), go to the financial accounting pages and look at my two accounting concepts pages: the concepts themselves and then the problems (conflicts with) the concepts.
• You also NEED to give some examples along the lines I have suggested here: take a look at my example about David Tasker that you'll find on my OLD web site (the link is at the top of the home page of duncanwil ...). If you didn't give examples in your answer and I were to mark it, I would knock off a lot of marks: I would need to see that you can apply what you can read and learn.
• To complete your answer on communicating ideas, you could discuss the elements of good reporting practice: providing clear and understandable reports that are presented on time to the right people using the right kind of jargon free language ...
• Finally, you have to draw up a conclusion: say what you believe the overall case/situation is and why ... what is your position and why ... after all, you will have started your answer by saying that you believe that accounting conventions either do or don't help with filtering, selecting and communications.

  Don't forget to cite all of your references in full, including my sites and notes: you MUST be honest here. No one will penalise you for talking to someone who might be able to help, but DO give credit where it's due.

  My last point is that you know your course and your syllabus and I don't. Whatever your lecturer has said is an important clue as to whether what I have written is of any use to you. Think carefully about the lectures in which these conventions were discussed and why the lecturer has asked you this question. This will give you the objectives and hypothesis and starting point at least.

  Let me know how you get on and I hope this is useful for you. I will be posting this in the feedback section of my web site but will probably leave your name out to protect your identity unless you want me to put you up in lights: tell me your preferences.

  Best wishes

  Duncan Williamson

  You can see the links to my concepts and conflicts in concepts page links on the left hand side of this page. The David Tasker link is there too.

  Duncan Williamson
  13 October 2001