Al- Najah National University

Faculty of economics social sciences

"Accounting Conservatisim Principle"

Supervised by: Dr. Muiz Abu Alia.

Prepared by: Asem Mohammad Haydareh

(11716217)

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Contents
Introduction:..............................................................................................................3
Conservatism Definition :..........................................................................................3
Advantages and Disadvantages of Conservatism:....................................................3
Advantages :...........................................................................................................3
Disadvantages :......................................................................................................3
The practical application of the principle of reservation and its effect on
accounting:................................................................................................................3
Conclusion:................................................................................................................4
References:................................................................................................................5

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Introduction:
In this report we will discuss some information regarding to conservatism; that’s mean
recognize expenses certainty or not in opposite the revenues which recognize when
you are sure of the possibility of occurrence significantly.

Conservatism Definition:
It is an accounting concept previously issued GAAP that recognizes and records
expenses and obligations certain and uncertain in nature. Revenue and assets are
recognized when the process of collecting them is confirmed and gives advice to record
unconfirmed cases and possible estimates. (accountingtools, 2019).

Under the principle of reservation when expecting a loss, we admit a loss, but when
there is doubt about the occurrence of revenue, we do not recognize the revenue.
(accountingtools, 2019).

Advantages and Disadvantages of Conservatism:

Advantages:
Among the positives of the principle of discretion is to reduce profits and maximize or
increase losses, and this leads to a decrease in income. (Investopedia, 2019).

Disadvantages:
One of the downsides of reservations is the use of legal termination methods such as
tax evasion. (Investopedia, 2019).

For example: the company increases bad debts or doubtful debts, which leads to
reducing the taxable profit and thus reducing the tax. (Investopedia, 2019).

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The practical application of the principle of reservation and its
effect on accounting:
The principle of reservation is one of the most important practices that affect the
accounting system and the preparation of financial reports, and the most important
examples are:

1. Inventory evaluation at the end of the financial period, which includes the value of
the stock based on cost or market and the selection of the least. (Investopedia,
2019).
2. Theft and losses. (Investopedia, 2019).

An example of a conservatism principle:

Accounting staff depends on the collection of doubtful receivables at 2% based
on previous years in addition to previous experience, but sales staff go to 5% due
to lower sales. We used 5% when creating an allowance for doubtful debts.
(accountingtools, 2019).

Conclusion:

 The primary goal of recognizing losses and not recognizing revenue is to avoid
amplifying the company’s profits.

 In this report, we realized the result of using the reservation principle that leads to
a reduction in the amount of tax paid.

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References:

Bragg, S. (2019, May 9). The conservatism principle. Retrieved from

https://www.accountingtools.com/articles/2017/5/14/the-conservatism-principle?
fbclid=IwAR3s4OcDm5qnn3wuDuNNpFaflb0fZ6lr84k-SuHtlTGiqG_NnskGZ20nY3A .

Liberto, D. (2020, January 29). Accounting Conservatism Definition. Retrieved from

https://www.investopedia.com/terms/a/accounting-conservatism.asp