Question

The convention of conservatism when applied to the balance sheet results in _________________.

• A. Understating the asset
• B. Understating the liabilities
• C. Overstatement of capital
• D. None of these

Answer 1

The correct option is A Understating the asset

The conservatism concept defines that the business should record all anticipated or future losses, but ignore the anticipated revenue or future revenue until it is realized.

Valuation of inventory on the basis of cost or realizable value is one of the examples of the conservatism policy. Not recording the appreciation in the value of land is another example. In both the cases, assets are understated.