The Prudence Concept

Topics: Depreciation, Generally Accepted Accounting Principles, Historical cost Pages: 1 (367 words) Published: November 7, 2011
The prudence concept
Being prudent means THAT YOU ARE CAREFUL ABOUT YOUR FINANCIAL SITUATION. IT MEANS NOT BEING CERTAIN ABOUT HAVING MONEY UNTIL YOU DEFINATLY KNOW YOU WILL BE GETTING IT. The prudence concept means that when you are running a business and trying to figure out what your profits will be you understate your profits rather than overstate them. It also means that you make a record of all the debts or money that you own out of the business and not writing down any anticipated profits. This is done so that you can know what you need to pay back and so you don’t get caught up into thinking that you will have money when you wont. The historical cost concept

This means the balance sheet for a business should show information on purchase prices of any of the businesses fixed assets and this is where the term “historical cost” comes from. Due to the constant change in market values these costs can bear no relationship to the present day value of the assets, although businesses usually give more information. Fixed Assets| Cost| Accumulated Depreciation| Book Value| | £| £| £|

Premises| 100,000| | 100,000|
Machines| 50,000| 20,000| 30,000|
Computers| 30,000| 10,000| 20,000|The prudence concept
Being prudent means THAT YOU ARE CAREFUL ABOUT YOUR FINANCIAL SITUATION. IT MEANS NOT BEING CERTAIN ABOUT HAVING MONEY UNTIL YOU DEFINATLY KNOW YOU WILL BE GETTING IT. The prudence concept means that when you are running a business and trying to figure out what your profits will be you understate your profits rather than overstate them. It also means that you make a record of all the debts or money that you own out of the business and not writing down any anticipated profits. This is done so that you can know what you need to pay back and so you don’t get caught up into thinking that you will have money when you wont. The historical cost concept

This means the balance sheet for a business should show information on purchase prices of any...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Accounting: Prudence Concept Essay
  • Application of Accounting Concepts Matching Prudence Accrual Essay
  • The Concept on Prudence: Dead or Alive? Research Paper
  • Concepts Essay
  • Account Concepts Essay
  • ACCOUNTING CONCEPTS Essay
  • Prudence Essay
  • Essay on accounting concept

Become a StudyMode Member

Sign Up - It's Free