Question

Concept of conservatism refers to taking into account ______________.

• A. All profit
• B. Only cash profit
• C. Only profit realized
• D. Profit realized and all possible losses

Answer 1

Answer: (D)

Profit realized and all possible losses

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 states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated.

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.