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In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. It states that when choosing between two solutions, the one that will be least likely to overstate assets and income should be selected.
Similarly, relative prudence is defined as absolute prudence, multiplied by the level of consumption. These measures are closely related to the concepts of absolute and relative risk aversion developed by Kenneth Arrow and John W. Pratt .
Consistency principle: The company uses the same accounting principles and methods from period to period. Conservatism principle : When choosing between two solutions, the one which has the less favorable outcome is the solution which should be chosen (see convention of conservatism )
IAS 1 sets out the purpose of financial statements as the provision of useful information on the financial position, financial performance and cash flows of an entity, and categorizes the information provided into assets, liabilities, income and expenses, contributions by and distribution to owners, and cash flows.
The prudent man rule is based on common law stemming from the 1830 Massachusetts court formulation Harvard College v. Amory. [1] The prudent man rule, written by Massachusetts Justice Samuel Putnam (1768–1853), directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of ...
Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events". If an entity practices the 'substance over form' concept, then the financial statements will convey the overall financial reality of the entity (economic substance), rather than simply reporting the legal record of transactions ...
Leland (1968) introduced a simple analytical framework that builds on the prudence individuals towards risk. This is a concept that economists define as decreasing absolute risk aversion risk aversion with a convex marginal utility (U"' >0). Leland proved that, even for small variations of future income, the precautionary demand for saving exists.
Common accounting constraints include objectivity (requiring verifiable evidence), the cost-benefit principle (weighing the cost of information against its usefulness), materiality (focusing on significant information), consistency (applying the same methods over time), industry practices (following accepted norms within a specific sector ...