Characteristics of prudence principle

Characteristics of prudence principle

Characteristics of prudence principle or concept can be explained in terms of cautious approach, maximum risk exposure etc. Prudence approach support the pessimistic view/picture of the financial statement.

Important Characteristics of prudence principle

Some important characteristics of prudence principle have been explained below;

1.   Prudence & Estimation

Prudence principle is widely used in the estimation process, because during the estimation process the accountant has an option to manipulate the financial information and show the favorable financial position.

2.   Cautious & pessimistic  Approach

Second Important Characteristics of Prudence Principle is a cautious approached adopted in the preparation of financial statement. It means that financial statement should not reflect favorable position.

3.   Prudence & Decision making

Prudence is believes that  the decision made on the bases of Financial statements should take into account less favorable situation of the entity. Thus prudence principle tries to minimize the risk in decision making process. The decisions taken on the bases of favorable position may carry higher risks.

4.   Risk Exposure Approach

Prudence is maximum risk exposure approach and it is against the minimizing the risk exposures. This approach tries to highlight the possible risks and does not support the projection of favorable situation.

5.   Assets are not overstated

In prudence concept asset are not to be overstated. The overstatement of asset may give a favorable position of financial statement and this is against the prudence principle.

6.   Incomes are not overstated

Under prudence concept Income are not to be overstated. Income overstatement improves the profitability of the company, and therefor it is not allowed under prudence concept or principle.

7.   Expenses are not understated

In prudence principle expenses are not overstated. The understatement of expenses will again improve the profitability, which is not allowed under prudence principle. Thus expenses should be accurately shown in the financial statements.

8.   Liabilities are not understated

Under prudence concept liabilities are not understated. We known that understatement of liabilities is a positive point, and this is not allowed under prudence concept.

9.   List of Characteristic of prudence principle

Some important characteristics of prudence principle are listed below

a.    It is caution & pessimistic approach.

b.    It tries to disclose all risk.

c.    Income & asset are not overstated under prudence.

d.    Expenses & liabilities are not overstated under prudence.

We have briefly explained some important characteristics of prudence principle in this article.