Q.A trader values his closing stock at cost price ₹1,20,000, even though its current market/net realisable value is ₹1,45,000. Which accounting convention justifies this, and what would the trader do differently if the market value had instead fallen to ₹95,000?

Stock valuation is the textbook illustration of the Conservatism convention, and it behaves asymmetrically depending on whether the market has moved up or down. …

The Convention of Conservatism (Prudence) requires that, when there is a choice or uncertainty, a business should anticipate no profit but provide for all possible losses. The standard rule this produces is: value closing stock at cost price or net realisable value (market value), whichever is LOWER.

In the first case, market value (₹1,45,000) is higher than cost (₹1,20,000) — recognising this unrealised gain now would mean anticipating a profit that hasn't actually been realised through a sale, which conservatism forbids. So the trader correctly continues to value stock at the lower figure, cost price of ₹1,20,000, and books no gain until the stock is actually sold. …

Assuming stock should always be valued at cost regardless of market movement — conservatism specifically requires writing DOWN to a l …