What is the principle of prudence?

The concept of the principle of prudence is the set of rules established in the recording of income. According to this definition of the principle of prudence, the company must record each of the movements and transactions of income and expenses. For this reason, the principle of prudence will be recorded in the Generally accepted accounting principles.

In addition, the application of the principle of prudence establishes that the company in question must record expenses and losses at the moment, from the moment they occur in order to provide an accounting image that is as faithful as possible to the accounts. On the other hand, the basic rule to know how to account for the principle of prudence indicates that income and benefits will be recorded at the time they are accrued.

At the same time, regardless of its nature, the depreciation of assets it will have to be recorded in the same way throughout each exercise. Therefore, the principle of prudence will appear in the situation balance as well as in the Profit and loss account. This is how each entity will value its assets and correctly establish the annual accounts.

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