An accounting principle that calls for the financial statements of an entity to reflect and represent the most conservative figures possible (particularly on the debit or asset side). It also requires that contingent or potential liabilities and expenses to be recorded and taken into consideration even if such items may not arise or occur, while revenues should be recognized only when such items are effectively earned.

Overall, an entity is required, under the principle of conservatism, to prepare its accounts and financials with due care and high degrees of verification. All likely liabilities including losses are recorded when identified as having occurred, while revenues and gains can only be recorded if and when fully realized.