Question

Making the provision for bad and doubtful debts in anticipation of actual bad debts is on basis of _________.

• A. Convention of disclosure
• B. Convention of consistency
• C. Convention of conservatism
• D. Conventions of disclosures and consistency

Answer 1

The correct option is C Convention of conservatism

The convention of conservatism means that the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated.

The following are some examples:

1. Closing stock is valued at cost price or Net realizable value, whichever is lower.

2. Joint life insurance policy is shown only at surrender value as against the amount paid.

3. Provision for doubtful debt is created in anticipation of bad debts etc.

4. Provision for pending law suit against the firm, which may either be decided in its favor.