Conservatism Principle
An accounting principle requiring higher verification standards for gains than for losses, recommending reporting lower profits and asset values when uncertainty exists.
Conservatism Principle
The accounting principle that requires a higher standard of verification for recognizing gains and assets than for recognizing losses and liabilities. When in doubt, accountants should choose the method that results in lower reported profit and asset values.
For example, a retailer anticipating a possible lawsuit might record a provision for the potential liability, even though the outcome is uncertain. However, it would not recognize potential settlement gains until they are virtually certain.
Conservatism helps prevent overstatement of assets and income, which could mislead stakeholders into overly optimistic decisions. While modern standards have moved toward neutrality, conservatism remains an important consideration when dealing with accounting estimates and uncertainties.