Prudence concept states what?

Prudence concept states what?

• A. Revenue is recognized only when cash is received.
• B. Revenue is included when realised and costs when incurred, with caution to avoid overstating profits.
• C. All expenses must be recorded even if not incurred.
• D. It requires using cash basis for simplicity.

Answer: (B)

Prudence means being cautious so you don’t overstate the financial position. In practice, this means recognizing income only when it is real and reasonably certain, but recognizing expenses and potential losses as soon as they are probable or incurred. This cautious approach helps ensure profits aren’t overstated. So, revenue is included when it is realized and costs are included when they are incurred, with a guardrail not to overstate profits. That matches the statement described. The other ideas describe cash-based timing or overly aggressive expense recognition, which aren’t how prudence operates.

Prudence means being cautious so you don’t overstate the financial position. In practice, this means recognizing income only when it is real and reasonably certain, but recognizing expenses and potential losses as soon as they are probable or incurred. This cautious approach helps ensure profits aren’t overstated.

So, revenue is included when it is realized and costs are included when they are incurred, with a guardrail not to overstate profits. That matches the statement described.

The other ideas describe cash-based timing or overly aggressive expense recognition, which aren’t how prudence operates.