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P2 C6 Conventions, Assumption. Concepts and Principles ofAccounting — Account STD 11 Commerce — Question

Gujarat BoardEnglish MediumSTD 11 CommerceAccountP2 C6 Conventions, Assumption. Concepts and Principles ofAccounting3 Marks
Question
Write short-note on: $(1)$ Prudence Concept :
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Answer

According to this concept of prudence, an accountant does not take into account anticipated gain or profit but provides for all anticipated losses. The two aspect of prudence can be stated as under: $(1)$ Recognise revenue or gain only when they are reasonably certain. $(2)$ Recognise expenses or losses as soon as they are reasonably possible. Closing stock is valued at cost or market price, whichever is less, provision for doubtful debts is made in the accounts, provision for discount on debtors, provision for contingent liabilities, provision for reduction or erosion in value of investments etc. are usually made in the books of account under the prudence concept. According to this concept, research and development expenses are usually debited to profit & loss account of the year in which they are incurred even if the benefit of such expenses is derived in future. If assets are understated by making higher provision and profit are understated by providing for more expenses. This principle also violates the principle of full disclosure. This principle should be applied carefullyand cautiously so that it does not have an adverse effect on business prudent reporting based on conservatism builds confidence in the results and, in the long run best serves the interetst of all stake holders and users of financial statement. This policy of prudent reporting leads to the concept of prudence of conservatism.

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