prudence concept The accounting concept that insists on a realistic view of business activity and stresses that anticipated revenues and profits have no place in a profit and loss account until they have been realized in the form of cash or other assets ...
The concept of prudence usually applies to the question of when you should recognise profit. A basic example would the fact that you record inventory in your accounts at the lower of cost and net realisable value, rather than at sale price, which (hopefully) contains a profit element. Instead the profit is only recognised when a legally enforceable sale has taken place.
Accounting concepts and conventions as used in accountancy are the rules and guidelines by that the accountant lives. All formal accounting statements should be created, preserved and presented according to the concepts and conventions that follow. In the United Kingdom, four of the following accounting concepts are laid down in Statement of Standard Accounting Practice number 2 (SSAP 2: Disclosure of Accounting Policies), they are the • Going concern concept
• Accruals or matching concept
• Consistency concept
• Prudence concept
This concept is the underlying assumption that any accountant makes when he prepares a set of accounts. That the business under consideration will remain in existence for the foreseeable future. In addition to being an old concept of accounting, it is now, for example, part of UK statute law: reference to it can be found in the Companies Act...