In this clip we will discuss with you
Conservatism Concept of Accounting
To understand this
I will present an example in front of you
We will go to our pad
Let's try to understand
Conservatism Concept of Accounting
What is this?
How? I will also tell you the second name of this
Friends This is a person
His name is
Amit Amit And this is also a person
His name is Sumit
Amit In Delhi
In Chandni Chowk Market
A ready made garments
If you say RG
He has opened a shop of ready made garments
Sumit's shop
Just next to him
His work is also of ready made garments
Although he
If he had opened a shop a little far
It would have been easy for him to make a monopoly
And competition
But competition is high
He said no, we will stay here
Both got the shop here
Now there is a big fight going on
Amit He purchased 10,000 pieces
Of ready made garments
At the rate Rs 100 each
He purchased a total of Rs 10,00,000
Sumit is fine
I am not behind
Sumit also purchased 10,000 pieces
Of ready made garments
Sumit also purchased Rs 10,00,000
Then Sumit
Sold 8000 pieces
Sumit sold 8000 pieces
At the rate Rs 150 each
Rs 12,00,000
Amit is saying
I have a shortage of customers
Amit also sold 8000 pieces
The rates are the same
Remember this
Because the market is the same, the customer is the same
The rates are the same
Now can you tell Amit
How many goods are left in the closing stock
At the end of the year
Purchased 10,000 pieces
Sold 8000 pieces 2000 pieces of closing stock is left
Amit has a warehouse
What is the situation of Sumit
Same situation
Sumit's closing stock is also 2000 pieces
Purchased 10,000 pieces
Amit also sold 8000 pieces
Closing stock is also 2000 pieces
Do you know
Our trading account
Here it is shown
By closing stock
In our balance sheet
In the balance sheet
It is shown at the asset side
How much stock is left at the end of the year
If you do not know, then I have told you
If you do not know, then I have told you my dear friends
that our closing stock will show the credit side in the
trading account and will show the asset side in the balance
sheet
I will make the lines straight
Yes sir
Now this is Amit's trading account and balance sheet
and this is Sumit's trading account and balance sheet
Sumit will also make his trading account and balance sheet
both will make
Sumit's trading account and Sumit's balance sheet
I will make the lines straight
Yes sir
Ok Here buy closing stock
Here also asset side stock
What is Amit saying?
Amit is saying that I will record 2000 pieces in my trading
account and in my balance sheet
But friend the entry will not be in the record pieces the
entry will be in the amount
Yes He is saying that there are 2000 pieces and one piece
I have to sell it for Rs.150
So he is saying 2000 pieces into Rs.150 means Rs.3 lakh
He recorded his stock at Rs.3 lakh
He is saying there are 2000 pieces
I will sell it next year
I will keep the sale price of one piece at Rs.150 and my
stock will be of Rs.3 lakh so its value is equal to Rs.3
lakh
Sumit is saying
I bought 2000 pieces at Rs.100 per piece
Here I will write 2000 into 100 means my closing stock is
Rs.2 lakh
One person is recording closing stock at purchase price and
one person is recording sale price at Rs.150
Both are recording separately
First thing
If Amit wants to do it at Rs.150
If Sumit wants to do it at Rs.100
What is our problem?
Let them do it at sale price
Let them do it at purchase price
Our problem is
Closing stock and gross profit has a direct relation
Closing stock and profit has a direct relation
In trading account,
GP means gross profit
If this closing stock is showing Rs.2 lakh and this is
showing Rs.1 lakh then its gross profit will be more than
Rs.1 lakh and this brother's gross profit will be less than
Rs.1 lakh
Closing stock has a direct effect on profit
If one organization is showing its closing stock at Rs.1
lakh then its profit will also increase by Rs.1 lakh and if
one organization is showing its closing stock at Rs.1 lakh
then its gross profit will be less than Rs.1 lakh
There is a direct relation
So friends,
Pay attention here
Both have the same purchase
Rs.10,000 for both, same cost price
Rs.100, Rs.10,000, Rs.10,000 total purchase price
Same pieces have sale
Sale price per unit is same
Total sale price is same
Rs.12,00,000 Both have different profit
How is this good?
One has more profit and one has less
Everything is same
Purchase unit is same, sale unit is same
Purchase price per unit is same
Sale price per unit is same
Profit is different
If this happens then accounting will be meaningless
You can ask any unknown person that we did accounting
Same purchase, same sale, same price
Despite this, both have different profit
The technique of accounting is wrong
You can ask any non-commerce science student that what are
you studying?
What is accounting?
This is useless, how can it be like this?
Accounting has shaken the whole world
This is wrong
If this does not happen with accounting
That's why a rule is made
Now I will rub the balance sheet
There is no need for this
If this does not happen with accounting
That despite having the same transaction
Both have different profit
A rule was made for this
And that rule says
Closing stock
Will be recorded at
Cost or market price
Whichever is low
Closing stock
Will be recorded at
Cost or market price
Whichever is low
Write this line
Dear children
This line is very precious
Conservatism concept is based on this line
What rule was made?
Closing stock will be recorded at
Cost or market price whichever is low
Means Means it was said that
Cost price means 100 rupees
And market price means 150 rupees
Whichever is lower
Closing stock will be recorded at
Cost price is 100 rupees
And market price
Means sale price is 150 rupees
So what is lower in both? 100 rupees
So he is saying
Record closing stock at 100
Means as Sumit has done
Record at 2 lakhs is fine
And he is saying
Don't record at 3 lakhs
Record it at 100
You also record it at 2 lakhs
This rule was made
Sir, on whose say this rule was made?
On whose say this rule was made?
And what is the basis of this rule?
Why was it made lower?
Cost or market price
Whichever is low
The basis of this
The basis of this rule is
When Amit was saying
Amit and Sumit
Both go to the court
And they are asked
Why do you want to record it at 150?
Amit said I will sell it and earn 150
I will record it at 150
Sumit was asked why do you want to record it at 100?
Sumit said
I bought it at 100 so I will record it at 100
So after calculating everything
He said Sumit your transaction
Is fine at 100
You also record it at 100
Amit asked why?
Why did you make this rule?
Why did you tell Sumit
To take lower value at 100?
See Amit Ji
You are predicting the future
You are
Dreaming in the future
And doing accounting
You are dreaming
That when the customer will come tomorrow
Then I will sell it at 150
If I sell t-shirts in the market, then I will get 300,000
rupees
So you wrote 300,000 today
What will happen in the future
You are writing it today
You are becoming Babaji
Are you becoming Babaji?
Why like this?
You can't predict the future
If it is not sold in 150,000
If there is a difference in taste in the market
If people don't like it
If there is a different product in the market
You have to sell it at a cost
Life can be like this
You have to sell it below 100
Don't predict the future
This was told
Don't record the profit in the future
What is the first basis of this?
The rule we made
Closing stock will be recorded at cost
And market price whichever is lower
This rule is based on this
That in the future
Future In the future
Profit
Don't record it today
Sell it in 150
In the future
Don't record the income
Don't predict the future
Don't think in the future
It will be good
I write a better word for this
What you are thinking in the future
It will be good
I will make another case in front of you, now I will make
another case in front of you, now I will make another case
in front of you, now I will make another case in front of
you,
now I will make another case in front of you, now I will
make another case in front of you,
then
then then sir cost or market price whichever is lower then
then
then then then
then then in future when customer will come he will take
our 100 in 80 he will take us in loss of 20 means sir if we
write it in 80 means we wrote our 100 thing in 80 which we
bought in 100 means we recorded loss absolutely right
I told you closing stock and profit has direct relation if
you bring 2 lakhs closing stock in 1.60 then your gross
profit will also fall from 40,000 your gross profit will
also fall from 40,000 so as soon as we recorded it in 80 so
what is the meaning of this means you dropped the profit
means you recorded loss of 40,000 you recorded loss of
40,000 my god now sir this is this is not a loss this will
happen in future this will happen in future so the second
basis of this rule is that in future
loss record the loss today
record the expected loss today
in future record the expected loss today
in future it will be bad do accounting like this my god
this is the rule of accounting yes do accounting like this
and friends these two things are given a name conservatism
concept conservatism concept says in future the prediction
of profit don't record it don't assume that future will be
good future will be good record it today assume that it
will be bad in future and on this basis this rule was made
closing stock will be recorded at cost or market price
whichever is lower why sir in future income think yourself
if you have to do accounting that for your business what is
the safety level absolutely even
it is bad our business will run if you have to think that
in future the money that will come will not come and the
money that will go will go will my business be stable will
I be able to survive in business will I be able to continue
business this is the thing assume that if you have to take
profit and do analysis of your business assume that in
future the money that will go will go and the money that
will go will go will we be able to survive in business
worst case scenario in future it will
dark what we think will not happen what is good will not
happen what is bad will happen will we be able to survive
in business this is the approach with this approach
accounting is done and that approach is don't record future
income record future loss and on this basis this rule is
made to record closing stock cost and market price which I
gave as an example friends there is another name of
conservatism concept prudence prudence sir write the
spelling
I will write the spelling you worried a lot write the
spelling I will write in big letters p r u d e n c e
prudence conservatism name is prudence flash notes
I have flashed notes in front of you let's read out these
notes lets read these out it tells the accountant error on
the side of caution when providing the estimate for asset
and liability which means that when there are two values of
a transaction available then always lower one should be
preferred It is written here in very simple words that if
there are two values available for any transaction then you
take lower value and go
Don't take higher value, taking higher value means that you
are expecting better in the future
Take lower value, expect the future to be bad and do
recording
It won't be good in the future, assume this and do recording
So you will be able to survive in the worst possible
scenario in business or not
This thing will come in front of you, you will get an idea
of this thing
Now see, I give one more example
You come after giving the paper
And in your paper, there are questions of 1, 1 number, 4,
4, and 6, 6 questions
Now you are calculating from 80, you have done something,
you have left something, you have done half, you have done
something
Now you are calculating whether I will pass or not
That is, will I be able to survive or not
Will I be able to survive or not, will I have to give the
paper again
Will I at least pass or not
So what will you do?
You will see that whatever I have written in my way will be
completely wrong
The teacher will not give me a single mark in it
In absolutely bad conditions
The numbers of what is written will not be found
Remove what is absolutely correct
The number you have written on an estimated basis will not
be found
Assume this
Then you will see that yes, I had written 4, 4
Remove them, not a single number was found in them
So 6, 6 numbers and 1, 1 numbers are absolutely correct
From there, yes, I will pass
So when do you keep this thought?
When you want to see whether you will be able to survive or
not
The same is the case in business
Whether you will be able to survive or not
To see this, the conservatism approach is followed
Its other name is prudence Let's meet in the next clip with
more information.
Till then, thank you and bye-bye.