Conservatism Concept(in detail) Video Lecture | Accountancy Class 11 - Commerce

conservatism concept conservatism
concept says provide for all future
losses recognize in comes only when
realized recognize in comes only when
actually realized that is why our
closing stock closing inventories that
is a basic principle which says a
closing stock should be valued what is
the value of a closing stock at cost or
realizable value whichever is lower
stock is valued and cost or realizable
value whichever is lower
why is closing stock valued at cost or
realizable value whichever is lower let
us understand suppose we have an item
with a cost of 100 and a sale value of
150 if this item I know I can sell this
item tomorrow for 150 rupees but I have
not yet sold it today and if I show it
at 150 it would mean that this profit of
50 this difference is profit of 50 is
being recognized in the current year
though I know for a certainty that it is
going to be sold next year I cannot I
cannot recognize this income in the
current year but suppose this size set
was the cost and this is the safe
selling price
suppose the cost is hundred and the
selling price for some reason has fallen
to 90 rupees then this closing stock is
valued at only 90 rupees because I
that tomorrow when I sell this stock I
will make a loss of 10 rupees so I
consider I make a provision for this
loss immediately similarly if I have
sold goods on credit to a person and I
expect him to default if I expect him to
default I have seen indicators there are
some indications that he is not going to
pay this money I have to provide for a
bad debt provide for a bad debt thus a
conservatism concept is another basic
concept very if we expect any losses we
provide for them but if but as far as
incomes are concerned even when the
expecting comes expect future profits we
can recognize them only when they are
actually realized