Question

In which of the following situations the principle of conservatism is applied?

• A. When there are two or more acceptable methods then the one which is most conservative is applied
• B. When there is possibility of loss the same is recognized and foreseen profit is ignored
• C. None
• D. Both (a) & (b)

Answer 1

The correct option is D Both (a) & (b)

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.