Principles of Accounting: The Prudence concept and the Business entity concept

You might have noticed that the business entity concept is not mentioned in the introduction to accounting concepts mentioned above
While that might be the case it is a principle that we have been universally applying thus far
The concept states:

Transactions associated with a business must be separately recorded from those of its owners or other businesses

As a result transactions that involve the infusion of benefits into the business are treated as capital injections
For example when the owner uses their own truck worth $5000 into the business:
1. We credit the Capital Account with $5000
2. Motor vehicle account (asset) is debited with the $5000 amount
Withdrawals by the proprietor are entered in the Drawings Account
The Current Account is also used in cases of Partnerships
Other accounts are used in the case of Limited Liability businesses (companies)
The name of the proprietor(s) is not used when recording transactions in their own books

Revenue must not be overstated and losses/expenses must be written off as soon as they occur

What this means is that sales and other revenue must not be recorded in the books unless we know that they have occurred
We should not for example record as a sale, a verbal promise to buy goods as a sale
Sales must only be recorded when the contract of sale has been signed
Similarly expenses such as bad debts must be recorded as soon as they occur
Also a provision for doubtful debts must be set aside to cover debts that are likely to be bad
Profits are not to be anticipated when they have not yet been realised
All losses must be recorded
Prudence is the most important concept and if there is conflict between prudence and another concept prudence prevails

To access more topics go to the Principles of Accounts Notes.

Principles of Accounting: The Prudence concept and the Business entity concept- Updated 2023