Which of the following are the applications of the conservatism principle of accounting? A. Valuation…
The accounting convention of Conservatism (or Prudence) directs accountants to 'anticipate no profit, but provide for all possible losses.' Its direct applications include…
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Which of the following are the applications of the conservatism principle of accounting?
A. Valuation of stock in trade at the lower of cost or market value
B. Debiting drawings account and crediting purchases account when goods are withdrawn by the proprietor
C. Making provision for bad and doubtful debts
D. Making provision for discount on creditors
E. Creation of investment fluctuation fund
Answer and explanation
Correct answer D
The accounting convention of Conservatism (or Prudence) directs accountants to 'anticipate no profit, but provide for all possible losses.' Its direct applications include valuing closing inventory at the lower of cost or net realizable value (A), creating a provision for bad and doubtful debts (C), and creating an investment fluctuation fund against potential market declines (E). Creating a provision for discount on creditors (D) anticipates a gain and violates conservatism, while (B) reflects the business entity concept.
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UGC NET Commerce