Question

Explain Prudence concept.​

Answer 1

Answer:

• Prudence concept in accounting (also known as conservatism) is a fundamental accounting concept which is based on the conservative approach of estimating the liabilities, expenses losses (i.e. cash outflow side) in a proactive manner and of estimating the assets, revenues and profits (i.e. cash inflow side) in a retroactive manner so that the liabilities are not understated and assets are not overstated.

Answer 2

Under the prudence concept, do not overestimate the amount of revenues recognized or underestimate the amount of expenses. Also, one should be conservative in recording the amount of assets, and not underestimate liabilities. The result should be conservatively-stated financial statements.