What is Prudence principle?
Also known as: foresight
The requirement not to overstate assets and income or understate liabilities and expenses in the financial statements. Where there is uncertainty, the accountant chooses a reasonable rather than an optimistic estimate. At the same time, NAS No. 1 states clearly that this principle does not allow creating hidden reserves or deliberately understating or overstating figures: prudence does not replace neutrality. Creating an allowance for doubtful debts and writing inventories down to net realisable value are typical cases in which this principle shows up in practice.
Source: 1-son BHMS, 22-band