Question

What is conservatism?

• A. Income is recorded when its earned
• B. Provide for all losses
• C. Will continue for a long time
• D. Must disclose all material information

Answer 1

The correct option is B Provide for all losses

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.