Prudence concept in accounting

The prudence concept in accounting requires the application of a degree of caution in making estimates under conditions of uncertainty.

If goods are expected to be sold below cost after the balance sheet date. For example, because they are damaged or obsolete, account must be taken of the loss in order to prepare the balance sheet. So the amount at which inventory should be stated in the balance sheet is the lower of cost and net realisable value.

Related posts:

1. Net realisable value
2. Inventory disclosure
3. Cost of goods sold inventory
4. Bad debt accounting
5. Inventory valuation methods: FIFO and LIFO