Convention of conservatism
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net assets and net income, and therefore lead companies to "play safe". When given a choice between several outcomes where the probabilities of occurrence are equally likely, one should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit.[1][2]
Conservatism plays an important role in a number of accounting rules, including the allowance for
doubtful debts[3] and the lower of cost or market rule,[4] which states that one should record inventory at the lower of either its acquisition cost or its current market value
.
See also
- Generally Accepted Accounting Principles(GAAP)
- U.S. GAAP
- International Financial Reporting Standards (IFRS)
- Conservatism concept [5]
- Prudence concept[6]
References
- ^ "The conservatism principle". June 2022.
- ISBN 978-81-269-0993-3. Retrieved 4 March 2013.
- S2CID 154445210.
- ^ "Lower of Cost or Market (LCM) | Explanation | AccountingCoach". AccountingCoach.com. Retrieved 2016-10-01.
- ^ "The conservatism principle". June 2022.
- ^ "The conservatism principle". June 2022.
Further reading
- André, P., Filip, A., & Paugam, L. (2013). Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe. ESSEC Working Papers WP1311, ESSEC Research Center, ESSEC Business School. Available at SSRN 1979748.
External links
- "Accounting terminology guide". New York State Society of CPAs. Retrieved 24 April 2017.
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