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Ratio analysis and the applications - Essay Example
Finance & Accounting
Pages 5 (1255 words)
Name Instructor Date Ratio Analysis and Applications Question One a) The Prudence Concept This is a concept in accounting that requires wise decision when preparing financial statements. It is viewed as one of the important frameworks of accounting. The prudence concept is usually used in issues of risk and uncertainty…
The first one is that valuation must be done in a prudent way. This means that when valuing assets on should make sound decisions in order to value the assets in question correctly the second principle states that; profits that are made in the balance sheet are the only profits that should be included in financial statements. The third principle stipulates that depreciation should be considered when reporting for a financial year regardless of whether it causes a gain or a loss. An example of where the prudence concept is normally used in accounting is when calculating profit or loss. For example, some liabilities are based on the possibility of an event occurring in the future and is expected to generate a profit or loss. If the likeliness of it happening is more than 50% it should be recorded depending on whether it results in a profit or loss. An example of such an event is a law suit. b) The Matching Concept This is a principle in accounting that stipulates that charges and incomes which relate to a financial year must be recorded regardless of the date when the payment of the charges or income was receipted. According to (Hoque, 2006), it is the accounting approach of allocating expenses to their respective incomes. The matching principle of accounting is governed by a number of principles. ...
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