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CSEET · Fundamentals of Accounting · Basic Concepts and Principles of Accounting

Mehta & Co. holds closing stock whose cost is ₹1,80,000 and whose net realisable value is ₹1,50,000. It values the stock at ₹1,50,000 and recognises the fall of ₹30,000 as a loss. Which convention does this illustrate?

This illustrates conservatism or prudence. The expected fall in value of ₹30,000 is recognised immediately by valuing stock at the lower of cost and net realisable value, whereas any possible increase in value would not be anticipated. Hence stock is shown at ₹1,50,000.

  1. AConservatism (prudence)Correct
  2. BConsistency
  3. CMateriality
  4. DFull disclosure

Explanation

Valuing stock at the lower of cost and net realisable value provides for the expected loss of ₹1,80,000 - ₹1,50,000 = ₹30,000 while an expected gain is not anticipated. This is the convention of conservatism. Consistency concerns following the same method year after year, which is not the point here.

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