Question

Explain briefly the conservatism concept of accounting with example

Answer 1

The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received.

Answer 2

Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain.

The conservatism principle can also be applied to recognizing estimates.

For example, if the collections staff believes that a cluster of receivables will have a 2% bad debt percentage because of historical trend lines, but the sales staff is leaning towards a higher 5% figure because of a sudden drop in industry sales, use the 5% figure when creating an allowance for doubtful accounts, unless there is strong evidence to the contrary.

The conservatism principle is the foundation for the lower of cost or market rule, which states that you should record inventory at the lower of either its acquisition cost or its current market value.

the conservatism principle is only a guideline. As an accountant, use your best judgment to evaluate a situation and to record a transaction in relation to the information you have at that time. Do not use the principle to consistently record the lowest possible earnings for a company.

Hope its useful ...!!!!!!!!!!