Which accounting principle suggests that assets should not be overstated?

The principle that suggests assets should not be overstated is the conservatism principle. This principle dictates that when faced with uncertainty, accountants should choose methods that minimize the overestimation of income or assets and the underestimation of expenses or liabilities. By doing so, it ensures that the financial statements present a conservative view of the company's financial position, reducing the risk of misleading users of the financial statements.

For example, under the conservatism principle, when valuing inventory or assets, it is advised to recognize losses or impairments when they are probable, while gains should only be recognized when they are realized. This approach provides a safeguard against inflated financial statements, ensuring that stakeholders have a more realistic understanding of a company's assets and liabilities. In summary, the conservatism principle is foundational in promoting accuracy and reliability in financial reporting by avoiding the overstatement of assets.