What does the principle of "conservatism" in accounting suggest?

The principle of "conservatism" in accounting suggests that when preparing financial statements, a company should exercise caution and prudence. This means recognizing liabilities and expenses as soon as possible, while delaying the recognition of revenues and gains until they are assured. The primary goal of this principle is to avoid overstatement of financial health and to provide a more accurate and cautious portrayal of a company's financial position.

By recognizing liabilities and expenses sooner, conservatism helps ensure that the financial statements do not paint an overly optimistic picture that could mislead stakeholders. This approach reflects a commitment to presenting a cautious view of income and financial prospects, thereby protecting users of the financial statements, such as investors and creditors, from potential risks associated with overestimating asset values or income.