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1. Is it true that prudence concept is when the profits are realized only when cash is received otherwise not; but losses are realized only when they are incurred?
2. Could you please explain if realization really depends upon when the cash is received because we follow the accruals concept which is unlike the cash accounting so why do we see when the cash is received?
3. Realized is when the money is received?
4. Unrealized is when the loss is incurred?
5. Could you please also explain what does prudence mean in accounting?
The prudence concept does not relate to whether cash has been received or not.
We should only bring in revenue that has been earned during the period (not future revenue that we are hoping to make). So when we make a sale, we record it.
We should record future losses as soon as we expect they will happen. So, for example, if we think that there is a danger that a receivable will not pay we should create an allowance for receivables and therefore charge the expense immediately.
Prudence means that we should not overstate our income and assets, and that we should not understate our expenses and liabilities.
In prudence concept we record revenue in the same year when they are earned and expenses in the same year when they are incurred which I get it…
BUT isn’t it true that in prudence concept profits are recorded only when the asset is sold and money is received which is the reason for valuing inventory at cost but expenses are recognised when they are incurred regardless when cash is paid which is reason for valuing inventory at NRV ???
Secondly, isn’t prudence concept and accrual accounting is the same thing!?
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