Principle of Conservatism

The principle of conservatism states that accounting should be done in a cautious and prudent manner. It means that while recording transactions, one should always err on the side of underestimating revenues and overestimating expenses.

Provision for Bad and Doubtful Debts

To adhere to this principle, provision is made for bad and doubtful debts. This means that an estimated amount is set aside to cover any potential losses from customers who may not be able to pay their debts. This provision is made at the end of each accounting period, based on past experience, and is recorded as an expense.

Depreciation

Depreciation is another way in which the principle of conservatism is followed. Depreciation is the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. To account for this, a certain amount of the cost of the asset is charged as an expense each year, reducing the value of the asset on the balance sheet.

Recording of Outstanding Expenses

The principle of conservatism also requires that outstanding expenses be recorded. Outstanding expenses are expenses that have been incurred but not yet paid. This includes things like rent, salaries, and taxes. These expenses are recorded as liabilities on the balance sheet, reducing the amount of profit reported on the income statement.

Conclusion

In conclusion, the principle of conservatism requires that accounting be done in a cautious and prudent manner. This includes making provision for bad and doubtful debts, charging depreciation on assets, and recording outstanding expenses. These practices help to ensure that financial statements accurately reflect the true financial position of a company.

The correct answer is option (A) Accounting conservatism is a principle that requires company accounts to be prepared with caution and high degrees of verification. All probable losses are recorded when they are discovered, while gains can only be registered when they are fully realized.