Question

Idenfity if these professionals should or should not record the transaction in the company accounts using the principle of purdence. Mark should or should not to the following 1. abby estimates that she might have to incur additional expenses for the purchase of raw materials next month 2. Dave buys fuel for his personal car 3. Hanna bought goods on credit 4. Carol estimates that the value price of the office building has risen by $75000 5. JL Inc bought stocks of another company

Answer 1

Principle of Purdence

Under the prudence concept, do not overestimate the amount of revenues recognized or underestimate the amount of expenses. You should also be conservative in recording the amount of assets, and not underestimate liabilities. The result should be conservatively-stated financial statements.

1) Should not record the transaction:
   Additional expenses for the purchase of raw materials are only the estimates. Estimates should not be record in the financial transanction.

2) Should record the transaction:
   It is a personal use but the fuel is purchased out of the companies fund. Therefore it should be record as Drawing.

3) Should record the transaction:
Liabilties should record when it arise

4) Should not record the transaction:
   Generally Accepted Accounting Principles donot allow to writting up the value of Fixed Assest. But International Financial Reporting Standards do allow for the upward revaluation of fixed assets.

5) Should record the transaction:
Under the principle of purdence, record the transaction when the asset is certain.