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CS Executive · Corporate Accounting and Financial Management · Introduction to Corporate Accounting

Under the accounting convention of conservatism, how should a company treat an anticipated loss and an anticipated gain?

Under conservatism, a company provides for anticipated losses but does not recognise anticipated gains until they are realised. This prudent approach prevents overstating profits and assets, so foreseeable losses reduce profit immediately while unrealised gains wait for actual realisation.

  1. AProvide for the anticipated loss but do not recognise the anticipated gain until it is realisedCorrect
  2. BRecognise both the anticipated loss and the anticipated gain immediately
  3. CIgnore the anticipated loss but recognise the anticipated gain
  4. DIgnore both until the end of the next financial year

Explanation

Conservatism requires prudence: all foreseeable losses are provided for, while gains are recognised only when realised. Recognising both immediately would overstate profit and ignore prudence. Ignoring losses while booking gains is the reverse of conservatism.

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