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What is an Accounting Convention?

An accounting convention is an established an agreed-upon method of documenting specific items on a company’s books.

The most widely-used accounting conventions are part of the Generally Accepted Accounting Principals (GAAP), which is the only accounting methodology accepted for quarterly 10-Q filings with the SEC in the United States, and has also become the basis for regulatory accounting practices in other countries.

There are also non-GAAP methods, also known as pro-forma accounting practices, which represent more informal conventions. Companies are likely to use non-GAAP methods in marketing materials, especially if they feel that GAAP does not give them enough flexibility to illustrate some of their financial decisions clearly, or in the best possible light.

Even so, investors have full access to the documents filed with the SEC if they request them. Pro-forma conventions disregard one-time “unusual or non-recurring” transactions, which could take many forms, and tend to obscure the expenses of the company and focus on the revenue.

The SEC has made it clear that using pro-forma accounting to mislead investors will be considered fraud, so a publicly-traded company must be very careful if using conventions other than GAAP. These non-GAAP methods will be used to make proposals and give projections to the board, lending banks, and others who are not investors.

A convention may also say which types of businesses should use cash accounting vs accrual accounting, which are explained in another article.

Keywords: Securities and Exchange Commission (SEC), 10-Q, accrual accounting, Generally Accepted Accounting Principles (GAAP), quarterly review, publicly-traded companies, pro-forma, non-GAAP, cash accounting,