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1 (a) ans-

"conservatism in the balance sheet is of dubious value if attained at the


expense of conservatism in the income statement, which is far more
significant."
A branch of accounting that requires a high degree of verification before making a legal claim to any
profit. Accounting conservatism will recognize all probable losses as they are discovered and most
expenditure as they are incurred. Revenue will be deferred until it is verified. Having strict revenuerecognition criteria is one of the most common forms of accounting conservatism.
A branch of accounting that requires a high degree of verification before making a legal claim to any
profit. Accounting conservatism will recognize all probable losses as they are discovered and most
expenditure as they are incurred. Revenue will be deferred until it is verified. Having strict revenuerecognition criteria is one of the most common forms of accounting conservatism. The convention
of conservatism, also known as the doctrine of prudence in accounting is a policy of anticipating
possible future losses but not future gains. This policy tends to understate rather than overstate net
assets and net income, and therefore lead companies to "play safe".
In accounting, it states that when choosing between two solutions, the one that will be least likely to
overstate assets and income should be selected.
According to this concept "expected losses are losses but expected gains are not gains". On the basis
of this concept closing stock is valued at cost price or market price, whichever is lower. Provisions for
bad and doubtful debts are maintained.
An accounting principle that requires recording expenses and liabilities as soon as possible, but
the revenues only when they are realized or assured. Also called conservatism principle.
Accounting transactions and other events are sometimes uncertain but in order to be relevant we
have to report them in time. We have to make estimates requiring judgment to counter the
uncertainty. While making judgment we need to be cautious and prudent. Prudence is a key
accounting principle which makes sure that assets and income are not overstated and liabilities and
expenses are not understated.
Examples
1. Bad debts are probable in many businesses, so they create a special contra-account to accounts
receivable called allowance for bad debts which brings the accounts receivable balance to the
amount which is expected to be realized and hence prevents overstatement of assets. An
expense called bad debts expense is also booked to stop net income from being overstated.
2. Some liabilities are contingent upon future occurrence or non-occurrence of an event such a law
suit, etc. We judge the probability of occurrence of that event and if it is more than 50% we
record a liability and corresponding expense at the most likely amount. Hence, we stop liability
and expense from being understated.
Periodic evaluations of assets are made to make sure their carrying value does not exceed the
benefits expected to be derived from the asset, and if it does exceed, the impairment of fixed
asset is recorded by reducing its carrying amount.
The conservatism principle is the general concept of recognizing expenses and liabilities as soon as
possible when there is uncertainty about the outcome, but to only recognize revenues and assets
when they are assured of being received. Thus, when given a choice between several outcomes
where the probabilities of occurrence are equally likely, you should recognize that transaction
resulting in the lower amount of profit, or at least the deferral of a profit. Similarly, if a choice of
outcomes with similar probabilities of occurrence will impact the value of an asset, recognize the
transaction resulting in a lower recorded asset valuation.
Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend
toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not
record the gain.

The conservatism principle can also be applied to recognizing estimates. The conservatism principle
is the foundation for the lower of cost or market rule, which states that you should record inventory
at the lower of either its acquisition cost or its current market value.
The principle runs counter to the needs of taxing authorities, since the amount of taxable income
reported tends to be lower when this concept is actively employed; the result is less reported
taxable income, and therefore lowers tax receipts.
The conservatism principle is only a guideline. As an accountant, use your best judgment to evaluate
a situation and to record a transaction in relation to the information you have at that time. Do not
use the principle to consistently record the lowest possible earnings for a company.

1(b) ansBalance sheet


In financial accounting, a balance sheet or statement of financial position is a summary of the
financial balances of a sole proprietorship, a business partnership, a corporation or other business
organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a
specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot
of a company's financial condition". Of the three basic financial statements, the balance sheet is the
only statement which applies to a single point in time of a business' calendar year.
Difference between fund flow statement and balance sheetFunds flow statement and balance sheet both are the statements of different nature. Funds flow
statement is a statement summarizing the significant financial changes which occurred between the
beginning and the end of a company's accounting period while balance sheet is a statement of
assets and liabilities at a particular point of time. Here are some of the important differences
between the two:
Funds flow statement include only those items which causes changes in working capital while
balance sheet includes the assets and liabilities of the company and shows total resources of the
company.
Funds flow statement can be used for decision making purpose while balance sheet is used for
examining the financial soundness of the company.
Funds flow statement is prepared for the use of internal management and hence its preparation is
not mandatory, while balance sheet is for the use of external parties like creditors, shareholders,
government and hence its preparation is mandatory for the company.
Funds flow statement is prepared after preparation of balance sheet and for a relatively short
period of time as compare to balance sheet

x
x

Balance Sheet vs. Fund Flow Statement


Balance sheet:
1.
2.
3.

Prepared to know the financial position.

Fund Flow Statement:

Prepared to know the total sources and


their uses in a year.
Prepared on the basis of different accounts in Prepared with the help of balance sheets of
ledger.
two consecutive years.
Shows the assets and liabilities, its a static It reveals the changes in the value of Fixed
statement.
Assets and their effect on flow of funds.

4.
5.
6.

Useful for all, i.e. Management, Shareholders, Useful for internal financial management.
Creditors, Outsiders and Govt. agencies etc
CA and CL are shown item wise.
CA and CL are used to find out increase or
decrease in working capital.
Its preparation is a statutory obligation and as
per prescribed
format

Its preparation is at the discretion


of the management.