- February 3, 2020 at 1:42 pm
if an asset cost $6000 and now has net realizable value of $5000 after 1 year which we would use in statement of financial position but i am confused which accounting concept are we using is this prudence concept or consistency concept(as we have reduced value of asset by 1 year of depreciation) i also want to ask if there is any concept named net realizable value concept or not?February 3, 2020 at 2:10 pm
Depreciation is application of the accruals (or matching) concept – we are spreading the cost by charging it to the accounting periods in which the asset is used.
The fact that we normally use the same depreciation method each year is application of the consistency concept.
There is no ‘net realisable value’ concept.
I deal with the relevant concepts and conventions for Paper FA in my free lectures.February 3, 2020 at 6:13 pm
why we can’t call it application of prudence concept?February 4, 2020 at 7:50 am
If we were showing the ‘true’ value of the asset in the SOFP then it could possibly be regarded as prudence. However, the point of depreciation is never to show the true value of the asset – it is to spread the expense over the useful life of the asset.
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