Characteristics of Prudence Principle

Characteristics of Prudence Principle

In this article we would explain some important characteristics of Prudence principle. prudence concept discourages the favorable projection of financial position and financial performance the company. Prudence concept provides useful guideline for estimation process in the financial accounting.

Characteristics of prudence principle

Some important characteristics have been briefly explained below.

1.   Relevance in Estimation

Prudence principle play important role in estimation process. We know that management is required to make many estimates during the preparation of financial statement like estimates for provision for bad debt, provision for warranty etc.

2.   Cautious Approach

Prudence concept suggests cautious approach in recognition of financial items. It means that organization should not give optimistic look or view of the financial statement, rather financial statement should be given a pessimistic view.

3.   Risk Minimizing Approach.

Prudence principle is basically a risk minimizing approach. This approach will reduce the risk of investors; creditor etc. investment on the bases of favorable financial position is more risky. Thus we can say that this approach is investor protection approach.

4.   Asset & Income not overstated

Under prudence concept the assets and income are not to be overstated by the company. Thus we can say that prudence approach financial position should not give a pleasant picture.

5.   Liabilities & Expenses are not understated

Under prudence concept liabilities & expenses are not to be understated. Thus financial performance and financial position would not be giving a favorable position.

Prudence principle characteristics list

Prudence principle characteristics are listed below

a)    Prudence principle is a cautious approach of preparing FS.

b)   Prudence is widely used by accountant in estimation of financial items.

c)    Prudence concept reduces the risk of investor.