Question

Discuss the concept-based on the premise ‘do not anticipate profits but provide for all losses’

Answer 1

According to the Conservatism Principle, profits should not be anticipated; however, all losses should be accounted (irrespective whether they occurred or not).

It states that profits should not be recorded until they get recognised; however, all possible losses even though they may happen rarely, should be provided.

For example, stock is valued at cost or market price, whichever is lower.

If the market price is lower than the cost price, loss should be accounted; whereas, if the former is more than the latter, then this profit should not be recorded until unless the stock is sold.

There are numerous provisions that are maintained based on the conservatism principle like, provision for discount to debtors, provision for doubtful bad debts, etc.

This principle is based on the common sense and depicts pessimism.

This also helps the business to deal uncertainty and unforeseen conditions.