Question

Valuation of closing stock at actual cost price or market price whichever is lower is an example of which accounting Convention? Explain that Convention. ( See Lesson 3

Answer 1

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● The convention of conservation also known as doctorine of prudence, is a policy of anticipating future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore leads companies to loss. When given a choice between several outcomes where the probabilities of occurance are equally likely , you should recognise that transaction resulting in lower amount of profit or deferral of profit.

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