Question

Creating provision against fluctuation in the price of investment is application of accounting concept _____________________.

• A. Convention of conservatism
• B. Convention of full disclosure
• C. Convention of consistency
• D. None of these

Answer 1

Answer: (A)

Convention of conservatism

Conservatism concept is basically "playing safe". This convention defines that, a company should record all the anticipated losses in the books of account. But anticipated gains are not to be recorded until actually realized. On the basis of this convention, valuation of inventory is done at cost or net realizable value, whichever is lower, provision for bad & doubtful debts, and fluctuation in the price of investment.