What guidance does the accounting constraint of conservatism offer. Please provide a concrete example.

Conservatism in Accounting is a branch of accounting
requiring a high degree of certainty and verification in order to legally claim a
profit.

Here are examples of techniques used in
conservative accounting:

1.  Recognize and include all
probable losses as they are discovered, anticipated or actually
occur

2.  Defer revenue until it is actually
received

3.  Use strict criteria for recognition of
revenue

4.  Overestimate projected losses from doubtful
accounts

5.  Underestimate the value of an asset,
especially if the value is uncertain

Here is an example of
conservative accounting that employs the application of the
“lower-of-cost-or-market-value” rule.  If an item in inventory cost $20.00 but can be
replaced for $15.00, the rule requires reporting the item in inventory at $15.00, and
reporting an immediate loss of $5.00.

Accountants
themselves needn’t be “conservative”.  Instead they must be fair and objective.  The
term “conservatism” requires such an accountant to “break a tie” between two reasonable
interpretations in order to avoid the danger of overestimating the firm’s
profitability.

Conservatism in accounting is particularly
important in today’s doubtful economy.  This has been dramatically demonstrated in
recent failures of large corporations in which accounting practices were highly
questionable and irregular…the antithesis of conservative
accounting.