A possibility of probable loss in future is to be considered for but a possibility of future profit of revenue is not to be considered. Such a concept is known as prudence concept or conservation concept. According to this concept, utmost care is to be taken while preparing the books of accounts.
Examples:
- The closing stock is valued at cost price or market price, whichever is less.
- Provision for doubtful debts on debtors is made in the accounts.
- Provision for discount reserve on debtors is made in the accounts.
- Provision for discount reserve on creditors is not made in the accounts.
- Provision for reduction or erosion in value of investments is usually made in the books of accounts.
- Contingent liabilities are shown in the Balance Sheet whereas contingent assets are not shown therein.
- In case of long term contracts, when the work completed is very less or negligible, loss is to be considered, but profit is ignored.
- All research and development expenses are usually debited to Profit and Loss Account of the year in which they are incurred.
- Provision for loss of theft of uninsured stock will be made in the books of accounts soon.
- When goods are supplied on ‘sale or return’ basis, the revenue is not recognised till the confirmation is received from the buyer for having agreed to purchase the same.
- Bank credit interest on doubtful advances to Interest Suspense Account and not to Interest Account.
- Assets like patents, goodwill, trademarks and copyrights are proportionately written off in the next coming years.
- The amount payable to the employees as gratuity must be recorded in the company’s accounts.
- Current assets like debtors are recorded in the books at the realisable value.
