Concept of conservatism, Accounting Basics

Concept of Conservatism:

The concept of conservatism, also termed as the concept of prudence, is frequently stated as "anticipate no profit, give for all possible losses". It implies as an accountant must follow a cautious approach. Facing an option, he must record the lowest possible value for revenues and assets, and the highest possible value for expenses and liabilities. As per to this concept, revenues or gains should be recognized only while they are realized in the form of cash or assets as generally legally enforceable debts the ultimate cash realization of that can be assessed along with reasonable certainty. Moreover, provision should be made for all identified liabilities, expenses and losses where the amount of these is identified with certainty, or is at excellent an estimate in the light of the information obtainable. Probable losses in respect of all contingencies must also be given for. A contingency is a condition, or a condition, the ultimate outcome of that gain or loss such cannot be found accurately at present. This will be termed as only after the event has happened or has not occurred. For illustration, a customer has filed a suit for damage against the company in a court of law. If the judgment will be favorable or unfavorable to the company cannot be found for sure. Thus, it will be prudent to give for likely loss in the financial statements. Since a consequence of the application of this concept, net assets and incomes are more probable to be understated than overstated.

Depends upon this concept is the broadly advocated practice of valuing inventory as stock of goods left unsold at cost or market price, either is lower. You will see this convention, in a manner, modifies the earlier cost concept. This should be stated as the logic of this convention has been in stress recently; this has been challenged through many writers on the ground which it stands in the way of fair determination of profit and the disclosure of fair and true financial location of the business enterprise. The concept is not related as strongly today as it utilized to be in the past. In any condition, conservatism should be applied rationally as over-conservatism may effect in misrepresentation.

Posted Date: 4/3/2013 5:54:32 AM | Location : United States







Related Discussions:- Concept of conservatism, Assignment Help, Ask Question on Concept of conservatism, Get Answer, Expert's Help, Concept of conservatism Discussions

Write discussion on Concept of conservatism
Your posts are moderated
Related Questions

Q. Explain about Money measurement concept? Money measurement concept. Economic activity is primarily recorded and reported in a common financial unit of measure the dollar in

A user buys a new transponder for $20. What debit and credit entries would need to be made?

Q. Ledger accounts in An accounting perspective? The idea of the Internet dates to the 1960s when the military tied together several computers forming a network that allowed us

Calculate the amount of interest for each of the following independent situations (assume 365 days per year):             a)

Received $170,000 cash from Electronic Arts, Inc. for service revenue earned in January.

Benefits of Purchases Discounts Purchases Discounts account is used to record discounts given for prompt payment. To prove ACCOUNTS PAYABLE LEDGER , you will look at bala

Prepare a trial balance All account names would be listed in left-hand column. Place the account balance in appropriate debit or credit column for those accounts which have

How do you set up a t account correctly?

Recording and reporting stock transactions and cash dividends across two accounting cycles Davis Corporation was authorized to issue 100,000 shares of $10 par common stock and 5