Definition of Accounting conservatism:
Generally Accepted Accounting Principles (GAAP) insist on a number of accounting conventions being followed to ensure that companies report their financials as accurately as possible. One of these principles, conservatism, requires accountants to show caution, opting for solutions that reflect least favorably on a company’s bottom line in situations of uncertainty.
A conservative approach to accounting which requires a high degree of scrutiny of probable losses, expenditures, and revenue prior to making any legal claim of profits, in order to insure clearly recognized and validated financial reports.
Accounting conservatism is a set of bookkeeping guidelines that call for a high degree of verification before a company can make a legal claim to any profit. The general concept is to factor in the worst-case scenario of a firm’s financial future. Uncertain liabilities are to be recognized as soon as they are discovered. In contrast, revenues can only be recorded when cash exchanges hands.
How to use Accounting conservatism in a sentence?
- All probable losses are recorded when they are discovered, while gains can only be registered when they are fully realized.
- If an accountant has two solutions to choose from when facing an accounting challenge, the one that yields inferior numbers should be selected.
- Accounting conservatism is a principle that requires company accounts to be prepared with caution and high degrees of verification.
Meaning of Accounting conservatism & Accounting conservatism Definition