prudence method — OpenTuition Forums

MNmuhammad nayan4y ago

2.14 Which of the following statements about prudence is correct? A Prudence requires assets to be carried at their lowest possible valuation B When prudence is applied, income is not recognised until the cash has been received C A prudent decision will mean lower expenditure D Prudence does not allow for overstatement of liabilities the answer is D, but I know that, in prudence method, prudence method don't overestimate = Assets, income don't understimate= liability, expense so how d is the answer? which prudence method says don't underestimate liability

John MoffatTutor4y ago#1

I am guessing that you found this question in the Bpp Revision Kit, and it is really a play with the words. The prudence concept does state that we should act on the side of caution, but that does not mean that it allows you to deliberately overstate liabilities. It is only if we are unsure of the liability that we should show higher liability rather than lower, but that does not mean that we should deliberately show ourselves as owing more than we actually expect to owe. For example, if we know that we owe suppliers $1,000 then we must show $1,000 as being owing. We cannot just decide to show $1,200 as being owing :-)

MNmuhammad nayan4y ago#2

thank you john

John MoffatTutor4y ago#3

You are welcome :-)

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