Resources ❯ Accounting Terms

Conservatism

[kən-ˈsər-və-ti-zəm]

What is the definition of Conservatism?

An accounting principle that requires recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but only recognizing revenues and assets when they are assured of being received. This principle directs accountants to anticipate potential losses but not to anticipate potential gains.

Using Conservatism in an Example

In applying the conservatism principle, if there is a lawsuit against the company that may result in a substantial loss, the company should record this potential liability in its financial statements immediately, rather than waiting for the outcome of the lawsuit.

Using Conservatism in a sentence

Due to the conservatism principle, the accountant decided to write down the inventory to reflect potential losses from unsold goods, rather than keeping the original higher value that might not be realized.

Related Terms

Cost Recovery Method

A method of revenue recognition in which profits are recognized only after all costs incurred are completely recovered. This method is typically used when the total amount of collections is highly uncertain.

Cost Segregation

The process of identifying and reclassifying personal property assets that are grouped with real property assets for depreciation purposes. This process allows the personal property assets to be depreciated over a shorter recovery period than the real property assets.

Cost of Capital

The rate of return that a business must earn on its investment projects to maintain its market value and attract funds. It represents the opportunity cost of making a specific investment, instead of investing the same funds in an alternative venture with equivalent risk.

Cost of Goods Sold

Cost of Goods Sold (COGS) represents the direct costs associated with the production of goods sold by a company. This includes the cost of the raw materials and labor used in the production of these goods.

Coupon

The interest rate on a debt security that the issuer promises to pay to the holder until maturity, expressed as an annual percentage of the face value.

Coupon Bond

A bond that is typically not registered with the issuing corporation and carries detachable coupons. These coupons state the amount of interest due and the payment date, which the holder must present to receive interest payments.

Coverdell Education Savings Account (Education IRA)

A tax-exempt trust exclusively established for the purpose of paying the qualified education expenses of the designated beneficiary, which can include higher education costs as well as elementary and secondary education expenses.

Credit

In double-entry bookkeeping, a credit is an entry on the right side of an account ledger that represents the increase in a liability, revenue, or equity account, or the decrease in an asset or expense account.

Credit Agreement

A legally binding contract in which one party provides funds or resources to another with the agreement that the receiver will repay the amount on a future date, potentially with additional interest or fees.

Credit Balance

A balance remaining after accounting entries that represents a liability or income to the entity, often indicating the amount that the entity owes to others or has in surplus.

Creditor

A party that loans money or other assets to another party, typically expecting repayment with terms agreed upon by both parties.

Current Asset

An asset that is expected to be converted into cash, sold, or consumed in operations within one operating cycle or within a year if more than one cycle is completed annually.

Current Liability

An obligation whose liquidation is expected to require the use of existing resources classified as current assets, or the creation of other current liabilities, typically due within one year.

Current Ratio

A financial metric used to evaluate a company's ability to pay off its short-term liabilities with its short-term assets. The current ratio is calculated by dividing the company's current assets by its current liabilities.

Current Value

The present worth of an asset, calculated either based on its current market price compared to its historical cost, or by discounting the future revenue stream of the asset using compound interest principles.

Current Yield

The annual interest received from a bond expressed as a percentage of its current market price.

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