A company owns a building whose market value rises substantially during the year. Under the prudence concept, the increase is generally not recognised as profit unless:
Correct answer: B. The gain is realised or permitted by the applicable reporting rules
- A. The owner approves the increase privately
- B. The gain is realised or permitted by the applicable reporting rules
- C. The building is insured for a higher amount
- D. The original cost is fully depreciated
Explanation
Prudence discourages recognising uncertain gains while requiring care in recognising probable losses. A gain may be recognised when it is realised or when the relevant accounting framework specifically permits recognition.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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