Prudence concept requires accountants to exercise a degree of caution in the adoption of policies and significant estimates so that the assets and income of the entity are not overstated whereas liability and expenses are not under stated. In case this concept is not followed, it should be clearly mentioned in the financial statements along with the appropriate reasons key highlights a strong assumption that an enterprise is a going concern and will continue operations for the foreseeable future. Find here several of the main accounting concepts - true and fair view, going concern concept, matching and accrual concept, consistency concept, prudence concept first of all let's start from the objective of the financial statements.
In addition to prudence concept the going concern concept allows valuation at lower cost or market on the assumption that the inventory will be sold in the normal course of business, unless there is evidence that the business may soon cease trading if the business is not a going concern, inventory may have to be sold off at a forced sale. Discuss the problems for companies in applying the accruals, prudence and going concern concepts when preparing financial statements, and explain why at least two other concepts might also be important. In this chapter we have discussed the fundamental accounting concepts including entity, going-concern, historical cost, periodicity, monetary measurement, realisation, matching, consistency, prudence, materiality, accrual, substance over form and fairness concepts. Accounting concepts 3 the entity concept the business is regarded as a separate unit from the owner it implies that assets/liabilities of the business are distinct from those of the owner.
The going concern concept of accounting is of great importance for accountants because if a company is a going concern, it must prepare its financial statements in accordance with applicable financial reporting framework such as generally accepted accounting principals applicable in united states of america (us-gaap) and international financial. Some of the fundamental accounting concepts that will be discussed are the accruals, matching, prudence, going concern and consistency concepts money measurement concept - accounting normally deals with only those items that are capable of being expressed in monetary terms.
Some of the fundamental accounting concepts that will be discussed are the accruals, matching, prudence, going concern and consistency concepts in drawing up accounting statements, you have to make sure that they fairly reflect the true value of the business and the results of its operation. The prudence concept does not quite go so far as to force you to record the absolute least favorable position (perhaps that would be entitled the pessimism concept) instead, what you are striving for is to record transactions that reflect a realistic assessment of the probability of occurrence. The going concern principle is the assumption that an entity will remain in business for the foreseeable future conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. In drawing up accounting statements, whether they are external financial accounts or internally-focused management accounts, a clear objective has to be that the accounts fairly reflect the true substance of the business and the results of its operation the theory of accounting has, therefore.
Financial statements accruals prudence and going concern concepts discuss the jobs for companies in using the accumulations, prudence and traveling concern constructs when fixing fiscal statements, and explicate why at least two other constructs might besides be of import. Going concern concept is a simple but very important financial accounting principle which stipulates the basis on which financial statements are prepared depending on the likelihood of the company continuing its normal course of business. The accrual concept in accounting means that expenses and revenues are recorded in the period they occur, whether or not cash is involved the benefit of the accrual approach is that financial.
Accruals concept: an entity matches income to expenditure in the period in which it occurred a disadvantage would be that the financial statements appear to show an entity which is quite profitable, but in reality the entity may have liquidity problems if it is not turning profits into cash. Financial statements are prepared under the accruals concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. The accruals and going concern concepts are regarded as fundamental in the preparation of financial statements discuss the advantages and disadvantages of these concepts, explaining the reasons why these concepts may be difficult to apply or may be inconsistent with other concepts.