Accounting Equation Effects Test 18

The convention of conservatism mean that the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated. The following are some examples:

1. Closing stock is valued at cost price or Net realisable value, whichever is lower.

2. Joint life insurance policy  is shown only at surrender value as against the amount paid.

3. Provision for doubtful debt is created in anticipation of bad debts etc.

4. Provision for pending law suit against the firm, which may either be decided in its favour.

The concept of conservatism (also called prudence) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. 

Joint venture is created by two firms for completing a particular project, or for a definite period of time. Hence, going concern concept is not followed in such case.

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. 

The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.

On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.

Concept is based on the periodicity concept. This implies that incomes and expenses must be recorded in books of account based on the accounting period followed by the firm.  There should be a match between the expenses and revenue in reference to the period of accounting.

This concept defines that revenue is recognized only when there is a transfer or exchange of goods or assets. Sale is complete only when the title of goods is passed on to the buyer.

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. 

The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.

On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.

Net realizable value means actual or estimated selling price in the ordinary course of business less cost of completion and estimated cost necessary to be incurred to make the sale.

The goods pending approval or return are valued at cost at the end of the accounting year. In case of Goods sent on approval goods are treated as sales only when they are actually approved.