Discuss the concept-based on the premise ‘do not anticipate profits but provide for all losses’
According to the conservatism principle, all anticipated losses should be recorded in the books of accounts, but all anticipated gains should be ignored until they are recognized.It states that profits should not be recorded until they are recognized; However, all possible damages, even if they occur rarely, must be provided for.
For example, a stock is valued at cost or market value, whichever is lower. If the market value is less than the cost price, the loss should be accounted for; Whereas, if the former is higher than the latter, this profit should not be recorded until the stock is sold. There are many provisions which are based on conservatism principle like, provision of exemption to debtors, provision for doubtful bad debts, etc. This theory is based on common sense and reflects pessimism. It also helps the business to deal with uncertainty and unforeseen situations.
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