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

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