Which principle ensures assets or income are not overstated and liabilities or expenses are not understated?

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Conservatism in accounting requires cautious measurement when there is uncertainty, so assets or income aren’t overstated and liabilities or expenses aren’t understated. This cautious approach is the practice of prudence. In practice, it means recognizing potential losses or expenses as soon as they are probable, while only recognizing gains or revenues when they are reasonably certain. For example, you would allow for a bad debt loss or write down inventory to net realizable value rather than waiting for ultimate certainty. Prudent measurement also leads to recognizing a provision for warranties or legal contingencies early rather than delaying recognition. Neutrality aims to avoid bias, completeness ensures all relevant information is included, and being free from errors focuses on accuracy; none of these specifically mandate the cautious timing of recognition that prudence requires.