Convention of conservatism

The convention of conservatism, also known as the doctrine of prudence in accounting is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to "play safe".

In accounting, it states that when choosing between two solutions, the one that will be least likely to overstate assets and income should be selected. Essentially, "expected losses are losses but expected gains are not gains".

Conservatism plays an important role in a number of accounting rules, including the allowance for doubtful accounts and the lower of cost or market rule.

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