Prudence or Conservatism Concept

While preparing accounting statements we make use of estimates as certain accounting data could be uncertain but it’s important to disclose an equivalent so as to present a real and fair view of the actual position of the business. While making such estimates an accountant has got to be prudent or must have a conservative outlook regarding an equivalent . The concept of Prudence states that “One shall not anticipate profit but shall always provide for all prospective losses”. This makes sure that the assets and incomes aren’t overstated, while liabilities and losses aren’t understated.

Examples

Bad debts are sure to occur in any sort of business. Due to the principle of prudence, we make provision for bad debts which helps a business show its current position.

The worth of assets is checked from time to time to form sure that their book value is not much different than their actual market value. In the case of fixed assets, if the actual market value is very low then the assets have to be impaired.


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Accounting Principles

According to The American Institute of Certified Public Accountants “Principles of Accounting are the overall law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”

Basic Accounting Terms

After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.

3 Fundamental Accounting Assumptions

After browsing this lesson, you shall be ready to understand the subsequent Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual