Question

What is the conservatism concept in accounting? (with an example)
And what is the purpose of the conservatism principle in accounting?

Answer 1

conservatism concept-

It means take into consideration all the expected losses but don't consider expected profits.

Example -

1) Creating provision against fluctuation in the prices of investments.

2) Use of Written down value method of depreciation instead of Straight line method. Actually written down value method of depreciation is more conservative in approach.

Purpose of the conservatism principle in accounting-

Purpose of conservatism principal in accounting is useful when is given below.

1) When there is uncertainty in activity. example - estimated liability, occurrence of loss.

2) When there are 2 method's equally but only one is conservative in approach will considered.

3) when there is possibility of profit or loss, only loss will be considered.