Question

In trading account, closing stock is shown at cost price or net realization price whichever is lower. This is due application of ______________.

• A. Convention of disclosure
• B. Convention of materiality
• C. Convention of consistency
• D. Convention of conservatism

Answer 1

The correct option is D Convention of conservatism

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 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.

On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.