Concept of Lower of Cost or Market Value
The rule of lower of cost or market value is based on the concept of conservatism in accounting. This concept requires that when there are multiple options for valuing an asset, the one that results in the lowest value should be chosen in order to avoid overstating the financial position of a company.

Conservatism in Accounting
Conservatism in accounting is the principle that assets and income should not be overstated, while liabilities and expenses should not be understated. This principle helps to ensure that financial statements are not overly optimistic and provide a more realistic view of a company's financial position.

Application of Lower of Cost or Market Value
When applying the lower of cost or market value rule, companies must compare the original cost of an asset with its current market value. If the market value is lower than the cost, the asset should be written down to the lower value. This ensures that the asset is not overstated on the balance sheet.

Justification for the Rule
The use of lower of cost or market value helps to maintain the principle of conservatism in accounting by ensuring that assets are not carried at values higher than their current worth. This practice also helps to provide users of financial statements with a more accurate picture of a company's financial health.
In conclusion, the rule of lower of cost or market value is based on the concept of conservatism in accounting, which emphasizes the importance of presenting a more cautious and realistic view of a company's financial position. This rule ensures that assets are not overstated on the balance sheet, in line with the principle of conservatism.

Conservation.