The Origin and Economic Impact of the Accounting Prudence Principle

In terms of income: If the commencement and completion of services fall in different fiscal years, revenue should be recognized according to the degree of completion of servicesIf the degree of completion cannot be reliably measured, the revenue shall be recognized according to the actual consumption cost, and when the incurred cost is higher than the possible recovery benefit, the revenue shall be recognized according to the actual income and profit.

In terms of assets: the principle of prudence is applied in many aspects of assets, firstly, the development cost of self-developed intangible assets is directly included in the current expenses, and the amortization period of intangible assets should be selected as the contract period, legal period, and operation period, the shortest of 10 years; Secondly, because there is a large intangible loss in the use of fixed assets, the accelerated depreciation method is adopted.

The principle of prudence is applied.

The principle of prudence is aimed at the uncertain factors in economic activities, and requires people to fully estimate the possible risks and losses in accounting treatment, and provide information reflecting business risks, which is conducive to protecting the rights of investors and the competitiveness of enterprises in the market. However, if the principle of prudence is used improperly, it may also reduce the reliability and comparability of the accounting information of the enterprise, and distort the accounting information. Therefore, it is necessary to strictly regulate the application of the principle of prudence in order to maximize its strengths and avoid weaknesses.

1. In terms of assets: the principle of prudence is widely applied in assets, firstly, the development cost of self-developed intangible assets is directly included in the current expenses, and the amortization period of intangible assets should be selected as the contract period, legal period, and operation period, whichever is the shortest in 10 years; Secondly, because there is a large intangible loss in the use of fixed assets, the accelerated depreciation method is adopted.

Secondly, the enterprise should conduct a comprehensive inspection of all assets on a regular basis or at least at the end of each year, and make provision for impairment of losses reasonably expected to occur, including: short-term investment impairment provision, long-term investment impairment provision, fixed asset impairment provision, intangible asset impairment provision, construction in progress impairment provision, entrusted loan impairment provision, bad debt loss provision, and inventory decline provision;

Finally, at the time of price **, the valuation method of issuing inventory is selected as the last-in-first-out method, and the first-in-first-out method is selected when the price is **.

2. In terms of income: if the start and completion of labor services belong to different accounting years, income should be recognized according to the degree of completion of labor services, and if the degree of completion cannot be reliably measured, revenue should be recognized according to the actual consumption cost.

Debt restructuring: The new system stipulates that if a debtor settles a debt with cash or non-cash assets that are lower than the book value of the debt, the debtor shall recognize the difference between the book value of the restructured debt and the sum of the book value of the cash or non-cash assets paid and relevant taxes and fees as capital reserve, and in the event of a debt restructuring loss, recognize it as a current loss.

On the creditor's side, when the debtor settles its debts with non-cash assets or debt-to-equity swaps, the creditor should record the carrying amount of the restructured debt as the value of the transferred assets or equity, but not the fair value of the non-cash assets.

In layman's terms, the principle of prudence is about the recognition of liabilities, let me give you a small example:

A company in the process of producing a certain product produced waste residue waste gas caused damage to the environment, ** after the investigation of the company filed a lawsuit, before the balance sheet date of the current year this case has not settled, but if the ** sue the company successfully, the company will have to pay a fine, we assume that the fine is 1 million, and the probability of the company losing the lawsuit is 80%, then we have to confirm the liability (accounts payable - fine) 1 million, because 80% This probability reaches the definition of "very likely". If the probability of the company losing the lawsuit is 5%, it is "extremely unlikely", and this potential liability not only does not need to be recorded in the balance sheet, but also does not need to be explained in the notes, which is equivalent to none.

There are three specific types of "very likely"; "between a very likely and a very small possibility"; I don't remember exactly what the probability definition of "probably" is and the calculation of the amount of the fine, but the basic idea is this.

The essence of prudence summary is one sentence: not overvaluing assets does not underestimate liabilities.

Advantages of the principle of prudence in accounting.

It is conducive to further squeezing out the water in assets and profits, and can provide more accurate and reliable accounting information for accounting information users;

Facilitates accurate business decisions;

It is conducive to protecting the interests of creditors and minority shareholders;

It is beneficial for enterprises to pay less income tax in the near future and improve their competitiveness in the market;

It is conducive to the adaptation of other basic accounting principles.

The principle of prudence has caused widespread controversy in the theoretical and practical circles in the process of China's financial accounting reform, which is mainly manifested in the following two aspects: First, excessive prudence. In the process of implementing contracted operations, Chinese enterprises conduct short-term predatory production for their own interests, and the principle of prudence has become a secret for enterprise contractors to conceal profits and evade taxes. The other is the lack of prudence.

The scope of implementation of the principle of prudence in Chinese enterprises is still narrow, and there is still a certain distance from the principle of full prudence.

For example, inventory, the provision for inventory decline makes the current profit calculation low, and the value of the inventory at the end of the period decreases, resulting in a low cost of sales in the later period, so as to make a profit. For companies with a large proportion of assets at the end of the period, such as real estate development companies, this can be a means of manipulating profits. As a result, an enterprise may write off a huge amount of sluggish inventory in a certain fiscal year, make a provision for a huge inventory decline, realize a huge write-off of inventory costs, and then successfully achieve a considerable amount of net profit in the following year.

This kind of earnings management can be achieved by underestimating the net realizable value of inventory at the end of the period without the need to write back a large amount of impairment provisions in the following year, and thus has a stronger concealment.

Summary. Hello, it is a pleasure to communicate with you. Examples of the principles of accounting prudence are as follows:

In terms of income: if the start and completion of labor services are in different accounting years, revenue should be recognized according to the degree of completion of labor services, if the degree of completion cannot be reliably measured, revenue should be recognized according to the actual cost of consumption, and when the cost incurred is higher than the possible recovery benefit, the income should be recognized according to the actual profit and profit.

In terms of assets: the principle of prudence is applied in many aspects of assets, firstly, the development cost of self-developed intangible assets is directly included in the current expenses, and the amortization period of intangible assets should be selected as the contract period, legal period, and operation period, the shortest of 10 years; Secondly, because there is a large intangible loss in the use of fixed assets, the accelerated depreciation method is adopted.

Accounting Prudence Principle Issues: Illustrated by Example.

Hello, it is a pleasure to communicate with you. Examples of the principles of accounting prudence are as follows: In terms of revenue:

If the commencement and completion of the labor services belong to different accounting years, the income shall be recognized according to the degree of completion of the services, and if the degree of completion cannot be reliably measured, the revenue shall be recognized according to the actual consumption cost, and when the incurred costs are higher than the possible recovery benefits, the income shall be recognized according to the actual recoverable benefits. In terms of assets: the principle of prudence is applied in many aspects of assets, firstly, the development cost of self-developed intangible assets is directly included in the current expenses, and the amortization period of intangible assets should be selected as the contract period, legal period, and operation period, the shortest of 10 years; Secondly, because there is a large intangible loss in the use of fixed assets, the accelerated depreciation method is adopted.

The application of the principle of prudence in accounting practice is as follows:

The principle of prudence, as an important principle used in the accounting of enterprises in China, is also known as the principle of conservatism or the principle of prudence. Since there are often many uncertainties in the accounting environment, which also increases the risk and difficulty of accounting work, it is best for enterprises to use prudent professional judgment and prudent accounting methods to deal with external risks and the accuracy of various accounting factors when they are unable to judge and confirm the accuracy of accounting measurements.

Therefore, the principle of prudence is a method for dealing with the uncertainty of accounting information in the course of business, and its most fundamental purpose is to safeguard the interests of the enterprise.

Enterprises in any stage of production and operation, will encounter a variety of different internal and external risks, for the enterprise can not determine the accounting information in a timely manner to take prudent accounting treatment methods, which to a certain extent can ensure the authenticity of accounting information, reduce enterprise risk, the use of reasonable and appropriate words, which is to enhance the ability of enterprises to resist risks, improve the level of production and operation of enterprises are of great significance.

Matters that should be paid attention to in the application of the principle of prudence in accounting work:

Although the application of the principle of prudence in the enterprise is of great significance, because there are still certain problems in the use of the principle of prudence, therefore, in various accounting affairs, enterprises should pay attention to the following matters: first, improve the comprehensive literacy level and work ability of accounting personnel; second, to reconcile the conflict between the prudential principle and other accounting principles; the third is to improve the relevant accounting laws and regulations; Fourth, avoid being overly cautious.

Because the principle of prudence itself has a strong subjective macro and tendency, it requires accountants to have a high level of comprehensive literacy and work ability. When applying various accounting principles, enterprises should treat them in accordance with objective and truthful accounting information, and reconcile the conflict between the principle of prudence and other principles.

a.Provision for impairment of fixed assets.

b.Provision for bad debts on accounts receivable.

c.The fixed capital is prudent and the production adopts the accelerated depreciation method.

d.Provision for impairment of intangible assets.

e.Provision for impairment of long-term equity investment.

Correct answer: ABCDE

The difference between the materiality principle and the precautionary principle is as follows:

1. The nature of the work is different

The principle of materiality is mainly transactional work. The personnel department is responsible for the decision-making of hospitality leaders.

The principle of prudence includes strategic work and transactional work, and approves the role of the organization, leading accounting institutions or accounting personnel to carry out accounting in accordance with the law and implement accounting supervision.

2. Different responsibilities

The principle of importance is responsible for the unified management of the property and materials of the unit, conducts a property inventory once a year, and improves the system of safekeeping, receiving, maintaining, compensating, scrapping, reporting losses and personnel transfer and handover, so as to ensure that the accounts are consistent.

The prudent Yuan and Takashi are responsible for organizing the preparation of the fund-raising plan and the use plan of the unit, and organizing the implementation. The fund-raising plan and the use plan should be combined with the unit's business and business decision-making, as well as production, operation, sales, labor, technical measures and other plans, on an annual, quarterly and monthly basis, and according to the economic accounting responsibility system of the enterprise, the plan indicators will be decomposed and implemented, and the implementation will be supervised. According to the requirements of production and operation development and saving funds, organize relevant personnel, reasonably approve the quota of funds, strengthen the management of the use of funds, and improve the effect of the use of funds.

According to the requirements of the combination of management and the centralized and hierarchical management of funds, formulate the implementation measures for fund management and accounting, and organize relevant departments to implement them.

3. The functions are different

The principle of prudence is widely used to prevent inflating assets and earnings, depressing liabilities and expenses, and to serve as an early warning and mitigation of risks. However, in practice, there is a phenomenon of using the principle of prudence to manipulate profits, so it is necessary to take necessary measures to pursue the advantages and disadvantages and make the accounting information more objective.

The materiality principle is conducive to further squeezing out the water in assets and profits, and can provide more accurate and reliable accounting information for accounting information users. make accurate business decisions; to protect the interests of creditors and minority shareholders; Enterprises have recently paid less income tax to improve their competitiveness in the market; Amendments to the adaptability of other basic accounting principles.

4. The work content is different

The principle of materiality mainly formulates and revises the organizational structure of authority and functional responsibility, and establishes a dual-track, mutual, vertical and horizontal information exchange system. ** For the needs of staff, make personnel input plans and pre-envision the required management policies and plans.

Staffing and use: that is, according to the needs of the work, the staff are recruited, assessed, rewarded and punished, and placed. Assist staff to continuously improve their personal work capabilities, and conduct pre-service training and on-the-job training.

The principle of prudence is mainly based on the principle of distribution according to work, and does a good job in the salary grading, promotion, and various insurance benefits of the staff. Through various educational methods, we should enhance the ideological and political consciousness of the staff and stimulate their enthusiasm and creativity. Summarize and evaluate the work situation and procedures in order to improve the management work.

Encyclopedia - Principle of Importance.

Encyclopedia - Prudence principle.