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What is the Prudence Concept? - YouTube
Channel: The Accounting Student
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do you know what the prudence concepts
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means hopefully you'll have a better
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understanding after watching this video
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I'm Thomas Harwood and welcome to
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accounting Susan where we create three
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and short videos so that you can learn
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about accounting
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today's video is signal what is the
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prudence concept firstly there are
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number of concepts or rules of
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accounting they are referred to by many
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as the accounting concepts these
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concepts and rules are fundamental in
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preparing the final accounts of an
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entity it can be said that to a certain
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extent the accounting concept helped to
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make final accounts relevant and
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trustworthy to its users overall there
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are 10 main accounting concepts of which
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the big one that we will look at in this
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video is of prudence concepts the
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prudence concept states that the final
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counts should always report conservative
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and conscious figures this includes the
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figure for the profit and valuation of
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assets
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additionally the business should not
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over value its profits or assets nor
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should it understate losses or
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liabilities also profits are not to be
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anticipated but recognized when they can
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be reliably measured when there is any
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doubt of value in an item the concept
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suggests that the item is recorded at a
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prudent amount in other words it should
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reflect as a conservative and cautious
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amount in their accounts the concept is
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applied to the account of a business in
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many ways the most common use of the
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prudence concept is the creation and
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application of the provision for
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depreciation in Schultz that provision
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is a book entry to reduce a value of an
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asset over its lifetime as a results
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that asset that value and profits are
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reduced to make these values more
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prudent another main use of the concept
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practice of the provision prepared s or
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doubt in debts
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the provision again is a book entry
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which reduces the amount of debts owed
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to the business this results in the
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debtors figure being reduced and
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therefore the amount reflected is more
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conservative and cautious let's give an
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example to illustrate the concept Rey
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owns and runs a secondhand shop which
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sells goods ranging from living-room
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furniture to sports memorabilia he
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recently bought a rare painting for
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2,000 pounds after buying the painting
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Ray's friend told him that a similar
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painting sold for 2,500 pounds at an
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auction ray is thinking of value in the
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painting at 2500 pounds in the accounts
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is he correct well in this situation Ray
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would be incorrect by following the
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prudence concept ray should not value
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the painting at the current market price
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ie
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the auction price because it will cause
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the profits and value of assets more
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specifically the painting to be
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overstated
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in the accounts furthermore the auction
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price is also an estimate value of the
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painting at the current time the
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concepts disagrees with estimating the
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value of items because they should only
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be recognized when they can be reliably
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measured therefore ray should recall to
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the painting as the amount it costs the
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business which will be 2000 pounds this
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results in the profits and values being
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prudent so that was a definition of the
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prudence concept if you enjoyed it press
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the like button if you have a question
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accountant shooter thanks for watching
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we'll see you next time
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