Convention of conservatism

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The convention of conservatism, also known as the doctrine of prudence in accounting is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to "play safe".[1]

In accounting, it states that when choosing between two solutions, the one that will be least likely to overstate assets and income should be selected.

According to this concept "convention expected losses are not losses but expected gains are not gains". On the basis of this concept closing stock is valued at cost price or market price, whichever is lower. Provision for bad and doubtful debts are maintained.

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References[edit]

  1. ^ Naseem Ahmed (2008). Financial Accounting. Atlantic Publishers & Dist. ISBN 978-81-269-0993-3. Retrieved 4 March 2013. 

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