Explain about conservatism, Accounting Basics

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Q. Explain about Conservatism?

Conservatism The Conservatism means being prudent or cautious and making sure that assets and net income are not overstated. Such overstatements are able to mislead potential investors in the company and creditors making loans to the company. We apply conservatism while the lower-of-cost-or-market rule is used for inventory. Accountants have to realize a fine line exists between conservative and incorrect accounting.

The next segment of this chapter discusses the conceptual framework project of the Financial Accounting Standards Board. The FASB planned the conceptual framework project to resolve some disagreements about the proper theoretical foundation for accounting.

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