Question

When applied to the balance sheet, the convention of conservatism results in __________.

• A. Understatement of assets
• B. Understatement of liabilities and provisions
• C. Overstatement of capital
• D. All of these

Answer 1

The correct option is A Understatement of assets

The convention of conservatism mean 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.

Principle of conservatism should be used very cautiously as it may disclose the lower profits in comparison to the actual profits. Balance sheet will disclose understatement of assets and overstatement of liabilities in comparison to actual values.