Conservatism Principle

Conservatism principle is an accounting principle that helps accountants in verifying the coming expenses, losses, profits and revenues. According to this principle accountants must use an approach where they must recognize their expenses and liabilities as soon as possible but record revenues and profits only when they are assure of their occurrence. This means in conservatism principle the accountant has to choose between the two alternatives and the accountant needs to recognize that possibility first where there resulting profit is low. In the same way the accountant must recognize the transaction that results in lowest recorded valuation of an asset.

This principle states even if there is a slightest possibility of incurring a loss you must go forward to record that possibility of loss. On the other hand if there is an uncertainty in incurring profit or gain you must not record that gain or profit. Conservatism principle can be tagged as the foundation of low cost or market rule that means the inventory of the business must be recorded at the cost lower than its market cost or the current cost.

The objective of the conservatism principle is that the accounts must be fair and objective so that they can fairly break the tie between two alternatives. The intention of implementation of conservatism principle is not to beat down the profit or assets of a business.

The implementation of conservatism principle is in tax authorities where the amount of taxable income is reported less that results in the lower tax receipts

Other Related Accounting Articles:

• Other Comprehensive Income
• Profit and Loss Statement
• Foreign Exchange Accounting
• Contingent Liability
• Historical Cost
• Operating Loss
• The Economic Entity Principle of Accounting
• Journal Accounting
• Accounting Principles and Accounting Equation
• Correct Capitalization Limit