PRUDENCE OR CONSERVATISM CONCEPT

· Recognize revenue only when they are reasonably certain

· Recognize expenses as soon as they are reasonably possible

NOTES:

This concept basically does not encourage the anticipation of recognizing income when it is not certain. It prefers that any expenses that can be reasonably ascertain should be taken up.

ILLUSTRATION

Company A has completed 50% of a project. Based on its costing and other evidence, it knows that the project is going to incur losses.

Question: Should the company only take up its losses at the completion of the project.

Answer:       Based on prudence concept, the company should quickly in its financial year take up this losses instead of waiting for the 100% completion of the project.