The conservatism principle of accounting is a generally accepted concept of recognizing ‘expenses’ and ‘liabilities’ as soon as possible when they became certain.
This principle follows the principle of accounting of Inventory for the closing stock, which is valued at lower of cost or market price. And is followed in Conservatism Principle in accounting. Recognizing the losses and liabilities as and when they become uncertain.
This principle also applies to the estimation of losses. Eg. Provision for doubtful debts, allowances for doubtful receivables.
It is a very simple principle! Provide for or recognize the loss and liabilities as & when it occurs.
But when it comes to Income (revenue) or an Asset, these will be only recognized as and when are assured of being received. This is an exception to the Conservatism Principle of Accounting.
This Conservatism Principle is also called a Conservatism concept or prudence concept.
