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Conservatism

"If  you are not quite sure it is safe to eat, throw it away." Conservatism is a principle that suggests that when faced with uncertainty, accountants should err on the side of caution and understatement rather than optimism and overstatement. The conservatism principle is aimed at ensuring that financial statements provide a reliable and realistic representation of a company's financial position and performance.

An example of conservatism is the Allowance for Doubtful Accounts. While the uncollectability has not been ascertained yet, but company accounts for its probability. 

Conservatism suggests that doubts better make the users of the FS believe in the poor profitability of the business when in fact it excellently performed than that they believe that the business is excellently profited when in fact it didn't. 

123 Akawnting
Basic Accounting Test Bank

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