The Prudence Concept
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one which gives the most cautions presentation of the business’s financial position or result.
The importance of prudence has diminished over time. Prudence is a desirable quality of financial statements but not bedrock. The key reason for this charge of perspective is that some firms have been over pessimistic and over stated provisions in times of high profits in order to profit smooth.
You should bear this is in mind as you read through the explanation of prudence. On the one hand assets and profits should not be overstated, but a balance sheet must be achieved to prevent the material overstatement of liabilities or losses.