Option 1-Comparable
Option 2-Realistic
Option 3-Simple
Accounting practices encompass various conventions to ensure the accuracy and reliability of financial statements. Among these conventions are:
Lower of Cost or Market: Inventory is valued at either its original cost or its current market price, whichever is lower. This approach prevents overvaluing inventory and provides a more realistic representation of its worth.
Cost Less Depreciation: Assets are recorded on the balance sheet at their original cost minus the accumulated depreciation. This principle acknowledges that assets' value diminishes over time due to wear and tear or obsolescence.
Materiality: For small items like pencils, pens, postage stamps, etc., the convention of materiality is applied. These items are treated as expenses in the year of purchase, despite being assets, simplifying accounting treatment.
Valuation of Stationery: Stationery is valued at its original cost, without considering fluctuations in market price, ensuring consistency and comparability in financial statements.
By adhering to these accounting conventions, financial statements become more comparable, straightforward, and reflective of the entity's actual financial position. |
