Question

Define the principle of conservatism and its importance.

Answer 1

Conservatism principle under accounting is one of the important principle, wherein all the expenses and liabilities that may occur in the future are recognised in the current period, but eventhough we know that a revenue or asset will be owned by the company, we shouldn't recognise the same until it is actually recognised.

Under conservatism expenses will be recognised even if there is an uncertainty about its occurence, bit income will be recognised only if it is guaranteed to be earned.

The importance of conservatism is that the principle of lower of cost or fair value is based on the background of conservatism, which is the base for accounting to some extent. Therefore conservatism is the main principle to be kept in mind while making several assumptions under accounting.