Question

The convention of conservatism is likely to lead the balance sheet in __________.

• A. understatement of assets
• B. overstatement of assets
• C. overstatement of capital
• D. understatement of liabilities

Answer 1

Answer: (A)

understatement of assets

This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule 'anticipate no profit but provide for all possible losses'. Examples Making provisions for Bad Debts, Making General Reserve, Valuing the stock at lower of cost or market value etc.
This convention understates the assets and over estimates the liabilities.