05-31-2009, 08:13 PM
W.Salam
Mr Irfan Prudence means recognizing all losses ,which may arise in the near future, & anticipating no gains unless there isn't a great certainity that economic benefits will flow to the entity.
From The theoritical view point the said defination is sufficient,
but practically if the concept of prudence is ignored then the following results are inevitable.
It would imiginary augment the Revenue which means increaing all profitability related ratios & in this regard such a profit may neither be used as a yardstick/benchmark to compare with others (Past or other industry) nor it may be compare to any previously used benchmark.
on the other hands such a gains/profit, ( which is uncertain) if incorporated in the books then it would surely augment Asstets since they will be recorded as a receivable & resultant effect would increaase current as well as liquidity ratios, that is current assets will seem to be much on the higher side, & such an effect may result in a liquidity problem.
If any stakeholder deals with such a company , or let say any financial institute approves loan on the basis of these ratios then company will not surely be able pay its debt & as a result, it will be sued by the lender & ultimately be liquidated due to being insolvent.
besides the said reasons there are many others too, if these are insufficient for you then tell me your email address for further assistance.
Mr Irfan Prudence means recognizing all losses ,which may arise in the near future, & anticipating no gains unless there isn't a great certainity that economic benefits will flow to the entity.
From The theoritical view point the said defination is sufficient,
but practically if the concept of prudence is ignored then the following results are inevitable.
It would imiginary augment the Revenue which means increaing all profitability related ratios & in this regard such a profit may neither be used as a yardstick/benchmark to compare with others (Past or other industry) nor it may be compare to any previously used benchmark.
on the other hands such a gains/profit, ( which is uncertain) if incorporated in the books then it would surely augment Asstets since they will be recorded as a receivable & resultant effect would increaase current as well as liquidity ratios, that is current assets will seem to be much on the higher side, & such an effect may result in a liquidity problem.
If any stakeholder deals with such a company , or let say any financial institute approves loan on the basis of these ratios then company will not surely be able pay its debt & as a result, it will be sued by the lender & ultimately be liquidated due to being insolvent.
besides the said reasons there are many others too, if these are insufficient for you then tell me your email address for further assistance.
