What is the underlying concept that support the immediate recognition of an estimated loss ?
Prudence
Prudence (conservatism) requires that anticipated losses be recognised as soon as they can be reasonably estimated, while anticipated gains are not recognised until they are realised. Recording an estimated loss immediately, such as a provision for doubtful debts or writing inventory down to net realisable value, is the direct application of this concept.
Substance over form requires transactions to be recorded according to their economic reality rather than their legal form, as with assets taken on hire purchase; it does not govern when a loss is recognised.
Consistency requires the same accounting policies to be applied from period to period so that statements are comparable; it does not call for early recognition of losses.
Matching links expenses with the revenues they help to earn in the same period; on its own it would carry a cost to the period that benefits, rather than charge an expected loss at once.
Hence, Prudence.
Similar Questions
Which of the following statements are correct ?
(a) Analysis and interpretation of financial statements, is a function of accounting.
(b) Profit and Loss account is prepared for ascertaining financial position of a firm.
(c) Goodwill is a wasting asset.
(d) Balance Sheet is prepared for ascertaining financial position of a firm.
Select the correct answer using the codes given below :
Codes :
Important Questions from Basic accounting principles
The policy ‘anticipate no profit and provide for all possible losses’ arises due to
“Advance received from a supplier is not taken as income or sales.” This comment is based on
Revenue from sale of goods ordinarily is reported as a part of the earning in the period
The generally acceptable accounting principles (GAAP) fulfill the conditions of
(i) Relevance
(ii) Objectivity
(iii) Feasibility
A firm purchases a piece of land after making full payment to the seller. However, the legal formalities are yet to be completed. According to which principle does the firm record the transaction in its books of accounts though the legal formalities are NOT completed?
