Redemption query

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mayur r pujari (Querist)
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06 October 2012 why is lower value taken into consideration betwn market price n cost price while valuing
closing stock..

CA Mahesh

CA Mahesh (Expert)
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06 October 2012 Because of accounting principle of conservatism. Which says we should recognise expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received. Thus, when given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit.
So we value closing stock at lower of cost and fair market value, so that the profit is not inflated.