Question

When preparing financial statements under Generally Accepted Accounting Principles (GAAP) we have a measurement or dollar valuation issues we must always consider. It is called “Conservatism”. What is conservatism in accounting and how does it work? What impact does this issue have on the preparation of the GAAP basis financial statements?

Answer 1

Conservatism principle is that principle under which assets/incomes are recognized only when they are assured but liabilities/expenses are recorded as soon as soon as they are due.

It is worked by creating recording uncertain losses and expenses and not mentioning uncertain liabilities and income which results in minimising the profits.

Impact on financial statements:-

1. Inventories are valued at cost or market value whichever is lower.

2. Allowances for doubtful debt is made.

3. Provision for casualty losses in financial statements.

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