Prudence is that…… First of all, in the words of Stefen Shaffer, ‘Prudence’ concept is that: * Do not anticipate profit by valuing at (>cost) more than cost. “Do not count your chickens before they ate hatched.” * Anticipate loss if reasonably expected to happen.
These means that, suppose that debtor amount is over 8 months, the debtor is still having it business. We cannot anticipate his amount as profit before we receive it because we cannot make sure whether he will pay or not. It will not be agree with Prudence cost. So we need to make a provision for bad debts for this account and besides, this amount will overstate our profit.
Prudence concept always related to company’s true financial statement and shows company’s exact financial situation. This means that company is able to stand in market or not. In other word, we can say that Prudence concept is reliable and honest friend for those who willing to invest their money in the company like government, owner, shareholders, prospective buyers, partner. Everybody decide whether to invest in or withdraw money from company after going through the company’s final statement. So we should not cheat them showing false statement of financial account. For example, the business has had a poor trading year. The owner want to change its straight line method of calculating depreciation into reducing method so that his expenses will be less because in his method depreciation is calculate on the reducing balance so depreciation cost will be less and profit will increase, but this goes against the convention of consistency, and secondly, the “Prudence” concept, where profit should not be overstated. Even this cannot be done if one method issued in one year and another method in the next year and so on. Constantly changing the methods would lead to misleading profits to be calculated from the accounting records. A firm can change the method used, when such a change...