Explanation:
The concept of conservatism states that the accountant should always anticipate possible losses but never anticipate gains. In other words, the accountant should always err on the side of caution when valuing assets and profits. The market value of the remaining goods was Rs.4,00,000, but the businessman valued the closing inventory at cost. This violates the concept of conservatism because the accountant should have valued the closing inventory at the lower of cost or market value.

Let us understand this in detail:

Meaning of the Concept of Conservatism:
The concept of conservatism is a principle of accounting that requires accountants to be cautious in their estimates and valuations. The concept states that a business should always anticipate possible losses but never anticipate gains. Therefore, when dealing with uncertainties in accounting, accountants should always err on the side of caution.

Example:
Suppose a business buys a piece of equipment for Rs. 10,00,000. The business estimates that the equipment has a useful life of 10 years and will have no salvage value at the end of its useful life. The accountant should not assume that the equipment will last for its entire useful life. Instead, the accountant should err on the side of caution and assume that the equipment might not last its entire useful life. Therefore, the accountant should depreciate the equipment over a shorter period, say 8 years, and assume that it will have some salvage value at the end of its useful life, say Rs. 50,000. By doing so, the accountant is being conservative in his estimates and valuations.

Violation of the Concept of Conservatism in the given example:
In the given example, the businessman violated the concept of conservatism by valuing the closing inventory at cost. The market value of the remaining goods was Rs. 4,00,000. Therefore, the businessman should have valued the closing inventory at the lower of cost or market value. By valuing the closing inventory at cost, the businessman is assuming that the goods are worth the same as what he paid for them. This assumption might not be true, and the businessman might end up overvaluing his closing inventory.

Conclusion:
In conclusion, the concept of conservatism requires accountants to be cautious in their estimates and valuations. The accountant should always err on the side of caution when valuing assets and profits. The businessman violated the concept of conservatism by valuing the closing inventory at cost instead of valuing it at the lower of cost or market value.

Consevatism