What is an accounting conservatism?
Conservatism is a financial approach that many companies use to reduce the amount of risk in their accounting information. This cautious method assumes lower profits along with higher losses. Companies can use this approach to prevent misleading or external commercial parties on the company's financial health. There are several methods for the application of conservative access to the company's accounting procedures.
Common methods
strict revenue recognition is a common policy for many companies using accounting conservatism. Recognition recognition is governed by the basic concept of accounting known as the principle of conformity, which requires that all expenses incurred during the accounting period should be included in all income reported in the financial statements. When the goods are sold or services are met and income is feasible, it is recognized; Realizable income indicates a transaction where items are exchanged for cash or claims for hotOverness such as an account of the fragmentation. Accounting conservatism does not notice income until all information concerning the financial transaction is feasible; This ensures that the company does not represent income, which can lead to inflated gross profit.
Another conservative approach in accounting is the overvaluation of the post for poor debts. Companies that sell goods or services usually find that they have balances on receivables; This means that several customers owe cash companies to complete the transaction. The BAD Debts post represents a number that the company expects not to receive from customers. Accounting conservatism records higher contributions to dubious accounts to ensure that the company's receivables represent a more accurate future view of cash collections.
The company can also use accounting conservatism to measure the value of the company Andobligations that represent a conservative approach to the balance sheet. Over the past decades, the financial markets have rely more on information about the balance sheet than on profit and loss statements, usually because the balance sheet provides information about the actual economic value of the company. The basic calculation of the economic value of the company is the total assets minus the total obligation; Conservative accounting approaches help ensure that this information is not excessive to introduce a better picture of the company's financial information.
False numbers
A significant problem in the use of accounting conservatism is the company's ability to ensure income in the current accounting period and excessive report, later. This happens because the company does not recognize income or creates a high contribution to dubious accounts, even if the money is actually collectible. Extremely high income in later dates can lead the business parties to the company that the company works better than in realityI is under current conditions. This fluctuating statement and loss and balance sheet can create distorted information, which makes it difficult to monitor its real financial performance.