The convention of conservatism is an accounting principle that requires accountants to err on the side of caution when recording estimates and assumptions in financial statements. In other words, accountants should lean towards underestimating revenue and overestimating expenses when there is uncertainty. The goal of this convention is to ensure that financial statements provide a true and fair representation of a company’s financial position.
This accounting principle is based on the concept of materiality, which holds that only information that is significant enough to impact a reader’s understanding of the financial statements should be included. Since estimates and assumptions are often subjective, accounting standards require that they be conservative in order to prevent accounting misrepresentation.
The convention of conservatism is one of several principles governing accounting practices. Others include the going concern principle, which assumes that a company will continue to operate for the foreseeable future, and the matching principle, which requires expenses to be matched with the revenue they helped generate. Together, these accounting principles provide a framework for financial reporting that is designed to promote transparency and accuracy.