Accounting Concepts- Prudence Concept
Definition
The prudence concept calls for accounts to be prepared on a conservative basis, not taking credit for profits or income before they are realized but making provision for losses when they are foreseen.
Example
Example 1:
A Nigerian bank suspects a major loan may not be repaid rather than waiting for the default to happen, the accountant immediately makes a provision for the potential loss in the current year’s accounts, erring on the side of caution.
Example 2:
A London property developer foresees a potential legal dispute that could cost £2 million, their accountant immediately provisions for this loss in the current accounts, even though the case hasn’t been settled, applying the prudence concept.