PRINCIPLES OF ACCOUNTS

THE ACCOUNTING CONVENTION WHICH STATES THAT PROFIT MUST NOT BE RECOGNIZED UNTIL REALIZED WHILE ALL LOSSES SHOULD BE ADEQUATELY PROVIDED FOR IS TERMED

  • A. materiality
  • B. objectivity
  • C. consistency
  • D. conservatism ✓

 

The accounting convention that states profit must not be recognized until realized while all losses should be adequately provided for is termed conservatism. Conservatism is a principle in accounting that suggests caution in recognizing revenues and assets, while being proactive in recognizing expenses and liabilities. This principle ensures that financial statements are not overstated and that potential losses are accounted for promptly.

Conservatism helps to ensure that financial statements provide a more realistic view of a company’s financial position by erring on the side of caution. By recognizing losses as soon as they are probable but delaying the recognition of profits until they are realized, conservatism aims to prevent overstatement of a company’s financial health.

This principle is particularly important in situations where there is uncertainty or risk involved, as it encourages companies to take a more conservative approach to their financial reporting. By providing for potential losses early on, companies can better prepare for any adverse events that may impact their financial performance.

In summary, conservatism in accounting helps to promote transparency and reliability in financial reporting by ensuring that potential losses are adequately accounted for while profits are only recognized when realized.

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