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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Gupta & Sons, Kanpur, has a debtors balance of Rs 2,00,000 at year end and estimates that Rs 10,000 of it may not be recovered. It creates a provision for doubtful debts of Rs 10,000 but does not record any anticipated extra gain from a pending claim worth Rs 25,000. Which convention is mainly followed?

Conservatism is followed. The firm provides for the probable loss on debtors but does not recognise the uncertain claim gain, reflecting the rule to provide for all possible losses and anticipate no profits. Matching and consistency do not explain the asymmetric treatment of loss and gain.

  1. AMatching
  2. BConsistency
  3. CConservatismCorrect
  4. DMateriality

Explanation

Providing for a probable loss of Rs 10,000 while ignoring an uncertain gain of Rs 25,000 reflects the rule 'anticipate no profit, provide for all possible losses'. That is conservatism. Matching would concern setting expenses against revenue of the same period, which is not the key point of this treatment.

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