Convention of conservatism

Accountancy
Key concepts
Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts · Journal  · Special journals · Constant Item Purchasing Power Accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO & LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance
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Financial statements
Statement of financial position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL
Auditing
Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act
Accounting qualifications
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In business, investment, and accounting, the principle or convention of conservatism has at least two meanings.

In investment and finance, it is a strategy which aims at long-term capital appreciation with low risk. It can be characterized as moderate or cautious and is the opposite of aggressive behavior.

In accounting, it states that when choosing between two solutions, the one that will be least likely to overstate assets and income should be selected.

According to this concept "expected losses are losses but expected gains are not gains". On the basis of this concept closing stock is valued at cost price or market price, whichever is lower. Provision for bad and doubtful debts are maintained.

See also

• Generally Accepted Accounting Principles (GAAP)
• U.S. GAAP
• International Financial Reporting Standards (IFRS)

References

• http://www.nysscpa.org/prof_library/guide.htm