Question

Explain the use of the following accounting records

i. Prudence

ii. Relevance

iii. Reliability

Answer 1

1. Prudence

Prudence Concept is the concept which states that revenue will be recognized only when they arecertain and expenses will be recognized as soon as they are reasonably possible. Prudence concept says not to overstate revenues, understate expenses, overstate assets and understate liabilities. For example Bad debts are probable in many businesses and these should be properly accounted for preventing the overstatement of assets. Uses of Prudence concept

1)         It helps in recording the revenue transaction or an asset when it is certain and records an expense transaction or liability when it is probable.

2)         It helps in evaluating that the carrying value does not exceed the benefits expected to be derived from the asset, and if it does exceed, the impairment of fixed asset is recorded by reducing its carrying amount.

ii. Relevance; the use of relevance concept is that the information is relevant for the decision maker and user of financial statement if it helps in predicting the future trends of the business. In other words, the information which is provided to the users must be relevant.

iii. Reliability; the information provided to the user should be reliable because on the basis of this information the potential users invest their money. If there are misstatements or omissions in the financial statements then it reduces the reliability of the information contained in them.