A proprietor, Mr. X has reported a profit of Rs. 1, 00, 000 at the end of the financial year after taking into consideration the following amounts.

(i) The cost of an asset of Rs. 10, 000 has been taken as an expense. (ii) Mr. X is anticipating a profit of Rs. 5, 000 on the future sale of a car shown as an asset in his books. (iii) Salary of Rs. 200 payable in the financial year has not been taken into account. (iv) Mr. X purchased an asset for Rs. 50, 000 but its fair value on the date of purchases was Rs. 60, 000. Mr. X recorded the value of asset in his books at Rs. 60, 000

On the basis of the above facts answer the following question from the given choices: Which concept should be followed in the statement (ii)?

Statement (ii): Mr. X is anticipating a profit of Rs. 5,000 on the future sale of a car. The conservation (or prudence) principle states: do NOT anticipate profits, but DO anticipate all losses. By including anticipated profit from a future sale in current profit, Mr. X is violating the conservation principle. Profits should only be recognized when realized (when the sale actually occurs). Materiality (B) is about whether an amount is significant enough to affect decisions - Rs. 5,000 may or may not be material, but that's not the issue here. Historical cost (C) is about recording at purchase price. Accrual (D) is about recognizing expenses when incurred, not about anticipating future profits. Therefore, the conservation principle should be followed (A).