Which of the following are key features of prudent accounting concepts and conventions?

(A) It includes revenues and profits in the accounts when they are realised.

(B) It prevents profits from being overstated.

(C) It prevents a trader from more withdrawing from the business than is wise.

(D) Managerial efficiency and expertise.

(E) Good customer relations.

Choose the most appropriate answer from the options given below:

The correct answer is (A), (B) and (C) only

Key PointsPrudence or Conservatism Principle is many a time described using the phrase "Do not anticipate a profit but provide for all possible losses." The application of this concept ensures that the financial statements do not paint a better picture than what it actually is. For example, closing stock is valued at a lower cost or net realizable value (market value) or making the provision for doubtful debts and discount on debtors in anticipation of bad debts and discount.

Additional Information 1. Recognition of Revenue
As per prudence, prospective income should not be recognized unless there are transactions (and not just events) that justify the certainty of the realization of revenue. This ensures that the revenue (so does the profits) are not overstated unduly without a base.

2. Recognition of Expenses
Prudence works in favor of expenses by not understating the same. It ensures that if there is a possibility for expenses to be incurred, it makes sure that the organization provides for such expenses.

3. Recognition of Assets
Prudence makes sure that assets are not overstated. Thus, the value of the asset should reflect the cost or near about value of realization.

4. Recognition of Liabilities
As per prudence, liabilities should not be understated. Thus, the value of liabilities will always be on the higher side than what it should be.