Principle of prudence in the application of accounting

[Abstract] the principle of prudence requires enterprises in accounting, it should follow the requirements of the principle of prudence, not more than total assets or income, less accrued liabilities or expenses, but not set up a secret device and it is correct from the accounting role general principles of this paper, the principle of prudent accounting standards in China's enterprises and accounting practices in the Application are discussed, and its correct use some suggestions.

[Keywords:] to confirm the principle of prudence stakeholders

First, the definition of the principle of prudence

The principle of prudence is the business transactions or matters of recognition, measurement and reporting to maintain due care and should not be overvalued assets or income, debt, or underestimating the cost.


Second, the principle of prudence in the concrete Application of our accounting

1. The principle of prudence in the <<Accounting Standards 2006>> Applications
(1) recognition of intangible assets
Standards No. 6 <<Intangible Assets>> states: the internal research and development expenditures, should distinguish between research expenditures and development phase, in which development expenditures while meeting the five conditions in order to be recognized as intangible assets, fully reflect the the principle of prudence, when intangible assets can not be expected to bring economic benefits for the enterprise, the enterprise should be the book value of intangible assets written off.

(2) Revenue recognition
Income guidelines to determine the sales of goods provisions of the following five conditions: ① corporate ownership of the goods has been the major risks and rewards transfer to the buyer. ② enterprise retains neither is usually associated with ownership of the management rights, no of control over the goods sold. ③ economic benefits associated with the transaction is likely to flow to the enterprise. ④ the amount of revenue can be reliably measured. ⑤ related to have occurred or will occur the cost can be reliably measured above five conditions must be met to recognition of revenue, any conditions are not met, even if payment is not received recognition of revenue, that is not at liberty to recognize revenue, which adequately reflects the accounting principle of prudence.

(3) provision for impairment of assets
Principle of prudence is the correct historical pricing principle, according to the principles of historical valuation, although there may be a simple bookkeeping and validation, etc., but with the emergence of inflation accounting and financial transactions and other business there, the historical cost valuation principle can not fully meet the needs of the relevance of accounting information, so they requested that companies should periodically for impairment of assets, is a manifestation of the principle of prudence, but also the business management needs the new guidelines in the provision for impairment of assets basically includes the balance sheet of all non-cash asset classes, not only provides provision for the inventory, fixed assets, intangible assets, goodwill, impairment and other financial assets, provision for impairment of the asset group also. and , clearly defined long-term asset impairment provision shall not be reversed once, avoiding the use of the guidelines regulating corporate profits.

(4) accelerated depreciation
Enterprises in the accounting of fixed assets, accelerated depreciation can be used to clear the way to depreciation in the accelerated depreciation method, depreciation and repair costs each year the sum of the average length of law than the use of smooth, underestimate the costs to prevent the overvalued assets, reflecting the principle of prudence therefore allow some industries, some companies based on the actual situation, the use of double declining balance method and the total number of years for accelerated depreciation method.

(5) where the processing
<<Or a matter of>> standards require enterprises to meet the conditions, the debt can be expected to occur without predictable events or assets for debt restructuring or the expenses involved, the debtor is expected to be recognized as liabilities, and For or income, creditors should not be recognized as an asset, can only be disclosed outside the table.

(2) the principle of prudence in the use of accounting practices
China's accounting practice from the use of perspective, the main show the following situations.

First, some insurance companies based on profitability, insurance allotment eligibility requirements, ignoring the corporate status quo, the abuse of the principle of prudence, and even a variety of "ready" and the annual provision for the transfer between the whitewash as a new means for impairment The provision for listed companies to manipulate assets and landscaping provides an opportunity for profit by any more or less put the impairment of assets to adjust the profits and net assets, raise funds to meet the conditions or exempt from being delisted.

Second, the extent of Application of the principle of prudence is not balanced, such as system is not on the ratio of provisions for impairment provisions to make clear and specific operational methods, which makes dealing with different companies in the same or similar circumstances As a result there is a big difference in the ratio, resulting in lack of comparability of accounting information between enterprises. In addition to listed companies, most small businesses is to ignore the principle of prudence.

Third, the professional quality of accounting personnel restricted the Application of the principle of prudence now, business methods and extract the impairment provision for the ratio of the matter or judgments require accounting personnel with more experience and high professional quality , while the lack of professional ability to judge the accounting is limited application of the principle of prudence.

Links to free download http://www.hi138.com Third, the correct use of the recommendations of the principle of prudence

I believe that the enterprise is using the principle of prudence, management can not be made mandatory, but only to make qualitative requirements, as business conditions vary widely, how to develop appropriate accounting policies and the appropriate accounting estimates, the impact of many factors, not the national policy can cover everything, and can only rely on their own grasp of the external accountant supervision and, once identified the accounting policies and accounting estimates, we can not arbitrarily change, so I think we should regulate the following aspects to the use of the principle of prudence.

1 must admit the necessity of the existence of the principle of prudence
The principle of prudence has its own limitations, but, as mentioned above, it is the quality of accounting information in the evaluation were still occupy an important position.

2 strengthen the relevant laws and regulations, specifically the consequences of abuse of the principle of prudence
This has been in the <<Enterprise Accounting System>> reflected in the <<Enterprise Accounting System>> states: "If there is conclusive evidence that the company improperly applied the principle of prudent provision for a secret preparation, should be treated as significant accounting errors be corrected, and notes to financial statements on the nature, amount of the adjustment, and the enterprise's financial position, results of operations. "which to some extent, corporate abuse of the principle of prudence is a constraint.

3 To strengthen the supervision and restraint mechanisms to strengthen
Due to information asymmetry and information costs exist, people have the motivation within the adjustment of accounting profits. To reduce this tendency, it is necessary to introduce external oversight mechanisms. In addition, the improper use of the principle of prudent accounting officer in addition to poor professional ability to judge objectively reasons, mainly because some stakeholders, the principles of prudent use of man-made adjusted profit, to seek their own interests, therefore, improve the corporate governance structure, establish internal containment mechanisms, in order to fundamentally weaken the principle of prudence in the use of improper motive.

4. The application of the principle of prudence and full disclosure of accounting information combined organic
The first application of the principle of prudence is to exist in the accounting field to judge matters of uncertainty reflected in a judge; Secondly, it showed a series of specific accounting treatment. Different method to determine the cause of their choice of course, will lead to different financial position and operating results, the results will ultimately affect the information users, especially users of external information in decision-making, therefore, all with the use of the principle of prudence, will affect investors and creditors and other information users to determine the reason for the current and future information in the financial report should be a comprehensive statement, including the principle of prudent accounting treatment of certain specific applications, background, impact, etc.

5. Improve the ability of the accounting professional judgments
Appropriate use of the principle of prudence is conducive to accurately reflect the state of corporate assets, to achieve capital preservation, or is likely to become a tool to manipulate profits, so take good care of the scale is critical, and systems and standards in the selectivity of the principle of prudence increasing scope, which requires the accounting officer must have a high professional discretion, seek truth from facts, honesty, avoid the subjective and arbitrary.

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