Explain convention of prudence and materiality
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Answer:
ᴛʜᴇ “ᴩʀᴏᴠɪꜱɪᴏɴ ꜰᴏʀ ʙᴀᴅ ᴀɴᴅ ᴅᴏᴜʙᴛꜰᴜʟ ᴅᴇʙᴛꜱ” ɪꜱ ʀᴇᴩᴏʀᴛᴇᴅ ɪɴ ᴛʜᴇ ʀᴇᴄᴇɪᴠᴀʙʟᴇꜱ ꜱᴇᴄᴛɪᴏɴ ᴏꜰ ᴄᴜʀʀᴇɴᴛ ᴀꜱꜱᴇᴛꜱ ᴀɴᴅ ɪꜱ ᴅᴇᴅᴜᴄᴛᴇᴅ ꜰʀᴏᴍ ᴛʜᴇ ꜰɪɴᴀʟ ꜰɪɢᴜʀᴇ ᴏꜰ ᴅᴇʙᴛᴏʀꜱ/ʀᴇᴄᴇɪᴠᴀʙʟᴇꜱ. ᴛʜᴇꜱᴇ ᴅᴇʙᴛᴏʀꜱ ᴀʀᴇ ɪɴᴄʟᴜᴅᴇᴅ ɪɴ ᴛʜᴇ ᴩʀᴏᴠɪꜱɪᴏɴ ᴜɴᴅᴇʀ ᴩʀᴜᴅᴇɴᴄᴇ ᴄᴏɴᴄᴇᴩᴛ ᴏꜰ ᴀᴄᴄᴏᴜɴᴛɪɴɢ. ...
Answer:
Prudence concept is a very fundamental concept of accounting that increases the trustworthiness of the figures that are reported in the financial statements of a business. The concept advises that the final accounts of a company must always show caution while reporting any figures specifically impacting the income and expenses. It means that the preparer must always show a conservative approach while reporting profits, revenues and assets and must only record these when they are actually realized. Simultaneously a company must always adopt a proactive approach towards the recognition of liabilities, losses and expenses. In simple terms the business must not overvalue its profits and assets until irrefutable evidence is obtained, as well as it must not undervalue its losses and expenses and must record provisions even if a possibility of occurrence exists. It may seem that prudence concept requires the company to go for every less favorable situation to be recorded, but it does not. The concept basically urges that financial statements must present a realistic perspective about every possible event that may impact the decision of the users of financial statements. International Accounting Standards (IAS’s) and Generally Accepted Accounting Principles (GAAP) incorporate the concept of prudence in many standards.
Explanation:
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