The prudence concept requires an accountant to:
Correct answer: D. Recognise probable losses but not uncertain gains
- A. Ignore losses until cash settlement occurs
- B. Record all expected gains before they are earned
- C. Overstate liabilities to make accounts safer
- D. Recognise probable losses but not uncertain gains
Explanation
Prudence requires caution when estimates involve uncertainty. Probable losses are recognised when appropriate, but gains are generally recognised only when they are sufficiently realised or earned.
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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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