Generally Accepted Accounting Principles Prudence Concept

Here we discuss about Generally Accepted Accounting Principles (GAAP) Prudence Concept.

What Does Prudence Mean

This Accounting Concept states that anticipate no profit but provide for all possible losses or in other words we can say that where alternative procedures or valuations are possible, then entrepreneur must choose those alternatives that give the most cautious presentation of the financial performance and financial position of the company businesses.

The Entrepreneur should be more cautious and anticipate loss first but no profit because when we make an estimate that profit will be made in future and if not made, then, we are not ready to meet the loss before its happening. So be careful and operate safely to maintain the stability of the company businesses.

Stock Valuation is a good example of this concept. We always record value of Stock or Inventory at lower of cost or Net Realizable Value (NRP). If we value the Stock / Inventory at the higher of Cost or NRP, then the company businesses will suffer the losses in the future when the value of Stock or Inventory will decline.

So, Now you are in position to better understand What Does Prudence Mean.