Question

The convention of conservatism is likely to lead to an ___________.

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

Answer 1

Answer: (D)

understatement of assets

Conservatism convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. This concept is based on "playing the safe"

Therefore, all prospective or anticipated losses are incorporated in the books of account while making the financial statement of the business. This leads to understatement of assets like providing depreciation or valuing inventory on cost or market value whichever is lower.