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Question
Name and explain the accounting convention which says record all anticipated losses but ignore all anticipated gains.
Solution
The principle states: record all anticipated losses but ignore all anticipated gains. It is the policy of playing safe. Following are the examples of the application of the principle of conservatism or prudence:
- Closing stock is valued at the cost of market price, whichever is less.
- Provision for doubtful debts is created in anticipation of actual bad debts.
- Joint life policy is shown at surrender value as against the amount paid.
However, deliberate attempt to underestimate the value of assets should be discouraged as it will lead to secret reserves which is against the principle of full disclosure.
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