What Is Accounting Conservatism?
Accounting conservatism is a financial approach companies use to limit the amount of risk in their accounting information. In short, this conservative method anticipates few profits along with significant losses. Companies use this approach so they do not mislead internal or external business stakeholders regarding the company’s financial health. Strict revenue recognition is a common policy for companies using accounting conservatism. Revenue recognition follows the basic accounting concept known as the matching principle. The matching principle requires all revenues reported on the financial statements to be reported with all expenses incurred during the accounting period. Revenue is recognized when the goods are sold or services complete and the revenue is realizable. Realizable revenue indicates a transaction where items are exchanged for cash or claims to cash, such as an accounts receivable. Accounting conservatism does not record revenue until all information relating to financi
