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Definition
The prudence concept requires caution under uncertainty: recognise liabilities and probable losses (via provisions and impairments) as soon as they are likely, but recognise income only when reasonably certain.
In plain terms
It builds a deliberate downward bias so accounts do not over-promise. Better to be pleasantly surprised than to distribute profit that was never really there.
Why it matters for your company
Prudence is why you provide for bad debts and doubtful stock before they crystallise. It gives lenders confidence the numbers are not window-dressed. See provisions.
Related reading
Provision (accounting)
A provision is money set aside in the accounts for a likely future cost you cannot yet pin down — bad debts,…
Read →Impairment
Impairment writes an asset down when it is worth less than the books say — a non-cash charge that keeps the…
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Matching principle
The matching principle recognises costs in the same period as the income they generate — the idea behind…
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Bad debt
Bad debt is money owed to your business that you no longer expect to collect — an invoice or loan that has…
Read →Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.