Query on basic accounting
This query is : Resolved
07 June 2013
Can i get few examples on Conservatism Principle which we are dealing in accounting. Please guide me.
07 June 2013
If a situation arises where there are two
acceptable alternatives for reporting an
item, conservatism directs the
accountant to choose the alternative
that will result in less net income and/or
less asset amount. Conservatism helps
the accountant to "break a tie." It does
not direct accountants to be
conservative. Accountants are expected
to be unbiased and objective.
The basic accounting principle of
conservatism leads accountants to
anticipate or disclose losses, but it does
not allow a similar action for gains. For
example, potential losses from lawsuits
will be reported on the financial
statements or in the notes, but potential
gains will not be reported. Also, an
accountant may write inventory down to
an amount that is lower than the
original cost, but will not write inventory
up to an amount higher than the original
cost.
acceptable alternatives for reporting an
item, conservatism directs the
accountant to choose the alternative
that will result in less net income and/or
less asset amount. Conservatism helps
the accountant to "break a tie." It does
not direct accountants to be
conservative. Accountants are expected
to be unbiased and objective.
The basic accounting principle of
conservatism leads accountants to
anticipate or disclose losses, but it does
not allow a similar action for gains. For
example, potential losses from lawsuits
will be reported on the financial
statements or in the notes, but potential
gains will not be reported. Also, an
accountant may write inventory down to
an amount that is lower than the
original cost, but will not write inventory
up to an amount higher than the original
cost.
07 June 2013
For example, if the collections staff believes that a cluster of receivables will have a 2% bad debt percentage because of historical trend lines, but the sales ataff is leaning towards a higher 5% figure because of a sudden drop in industry sales, then use the 5% figure when creating an allowance for doubtful accounts, unless there is strong evidence to the contrary.
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