CSEET · Fundamentals of Accounting · Basic Concepts and Principles of Accounting
Sharma Traders values its closing stock at cost Rs 80,000, though its net realisable value is Rs 72,000. It values the stock at Rs 72,000. Which convention does this follow?
The valuation follows conservatism, or prudence. Stock costing Rs 80,000 with a net realisable value of Rs 72,000 is shown at Rs 72,000, so the expected loss of Rs 8,000 is recognised but no anticipated gain is ever taken into account.
- AConservatism (prudence)Correct
- BConsistency
- CMateriality
- DFull disclosure
Explanation
Under conservatism, anticipated losses are provided for but anticipated gains are not recognised. Stock is therefore valued at the lower of cost and net realisable value, Rs 72,000, which reduces profit by Rs 8,000. Consistency concerns using the same method year after year, which is not the issue here.
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