What does the Conservatism Assumption dictate when reporting financial items?

The Conservatism Assumption is a fundamental principle in accounting that guides financial reporting. It emphasizes prudence in recognizing financial items, suggesting that when presented with uncertainty, accountants should choose methods that do not overstate assets or income. Under this assumption, potential losses are recognized as soon as they are foreseeable, while potential gains are only recognized when they are realized or certain.

Choosing to record potential losses over potential gains helps prevent the financial statements from being overly optimistic and misleading to users, such as investors, creditors, and management. This cautious approach ensures that stakeholders receive a realistic view of the company's financial position, protecting them from the risks associated with inflated financial representations. As a result, the Conservatism Assumption serves to uphold the integrity and reliability of financial reporting.