Question

Why is it important for accountants and businesses overall to state accurate financial information and be conservative if there are choices in how to record and present information?

Answer 1

The business and its environment is usually uncertain and vague. This uncertaininty require the accountants and business houses to be very conservative in their approach when recording and reflecting any item or transaction in their financial statements. Say, for example a firm has a lawsuit pending with the district court and the chances of its winning are more than not. Now, looking at the chances of winning the firm did not provide any provision for losing the lawsuit in the books and thus the profits were inflated. But in the course of hearing, the firm loses the lawsuit and is now bound to pay the charges and penalties. In this case, the approach that firm applied has failed, as it would have been more conservative while providing for the potential losses from losing the claim. This kind of scenario which is unseen and uncertain, requires stating accurate picture of financial information and adopting a conservative approach and dealing.