![Top 10 Accounting Automation Software You Need To Try!](https://media-center.appvizer.com/articles/123011972/cover/com/cover-picture_w227.webp)
![Principle of Prudence- Understatedness in Accounting](https://media-center.appvizer.com/articles/77038367/cover/com/cover-picture_w600.webp)
Principle of Prudence- Understatedness in Accounting
We’ve all heard of or know people or companies that flaunt their wealth, pretty annoying, right? For companies that might come from executives or talking heads looking to boost the brand’s image, but accountants are a different story. Keep reading to find out how and learn about the principle of prudence.
Definition
As we said before, accountants aren’t like other departments or employees of a company. What they report and say should be measured and backed up. That’s where the principle of prudence comes into play, the principle of prudence says that accountants are expected to be conservative with their reporting of things like total assets and predicting future gains and losses. Instead of overestimating those indicators, they underestimate them, leading the business to, in turn, make conservative financial decisions.
Principle of prudence is one of the ten GAAPs, Generally Accepted Accounting Principles, meaning that they’re the base of how any accountant works and functions. They allow all accountants to have a common framework so they all understand each other. Without them everybody would have their own way of doing things, and nobody would understand each other.
It should be said that GAAP is only for the US, but the principle of prudence is pretty universal. Other countries have different accepted principles like the IFRS, International Financial Reporting Standards.
Excessiveness in Accounting
Let’s say the accountant were to overestimate the assets that a company has, and then the executives of that company overextend themselves, leading to major losses or some other catastrophic event. This is exactly what the principle of prudence aims to prevent.
Think of it like this, when you underestimate something, you always have room to grow and go above targets or objectives set. However, if you’re overshooting and not realistically stating your assets or future gains or losses, you can only be disappointed.
Principle of Prudence- Staying
Like the other GAAPs, the principle of prudence is there to provide accountants with a solid base and philosophy on which to base their work. As we’ve said before, without it accountants in the US wouldn’t be able to understand each other’s numbers, people wouldn’t know which numbers are right and which aren’t.
Discover our complete Accounting catalog
See all software![Top 10 Accounting Automation Software You Need To Try!](https://media-center.appvizer.com/articles/123011972/cover/com/cover-picture_w227.webp)
![The 5 Best Cloud Accounting Software - Is the Future of Accounting Already Here?](https://media-center.appvizer.com/articles/123140665/cover/com/cover-picture_w227.webp)
![10 Best Free Accounting Software That You Need To Try!](https://media-center.appvizer.com/articles/122884528/cover/com/cover-picture_w227.webp)
![Out With the Old and In With the New: Reversing Entries in Accounting](https://media-center.appvizer.com/articles/121327839/cover/com/cover-picture_w227.webp)
![GAAP vs IFRS: What are the Similarities and Differences?](https://media-center.appvizer.com/articles/67110155/cover/com/cover-picture_w227.webp)
![Pro Forma Income Statement Template [Excel]: Useful Tool for Your Accounting Process](https://media-center.appvizer.com/articles/104992085/cover/com/cover-picture_w227.webp)
![A Complete Guide to Depreciation of Fixed Assets](https://media-center.appvizer.com/articles/33212511/cover/com/cover-picture_w227.webp)
![Why are Adjusting Entries Necessary? A Simple, Yet Best Advice](https://media-center.appvizer.com/articles/90240266/cover/com/cover-picture_w227.webp)
![The Top Accounting Software for Small Businesses in 2024](https://media-center.appvizer.com/articles/40960280/cover/com/cover-picture_w227.webp)
![The Best Accounting Software for Nonprofits [Comparison]](https://media-center.appvizer.com/articles/40604438/cover/com/cover-picture_w227.webp)
![The Best Accounting Software for Consultants in 2024](https://media-center.appvizer.com/articles/40693157/cover/com/cover-picture_w227.webp)
![What is Fixed Assets Disposal and How to Record it?](https://media-center.appvizer.com/articles/85702201/cover/com/cover-picture_w227.webp)
![A Simple Definition of What You Should Know about The Pay-In-Slip](https://media-center.appvizer.com/articles/79851996/cover/com/cover-picture_w227.webp)
![Small Business, Big Finances: Improve Your Accounting With The 11 Best Financial Software](https://media-center.appvizer.com/articles/xcbl6ls4tdshisoqceoagw/cover/com/cover-picture_w227.webp)
![Which Accounting Software Should your Company Choose for its Bookkeeping?](https://media-center.appvizer.com/articles/33213032/cover/com/cover-picture_w227.webp)
![Top 5 Employee Leave Management Platform [Reviews]](https://media-center.appvizer.com/articles/123062990/cover/com/cover-picture_w227.webp)
![Best Open Source Accounting Software: Reviews and Comparison](https://media-center.appvizer.com/articles/121558415/cover/com/cover-picture_w227.webp)
![Make an Estimate in 5 Simple Steps: Free Estimate Template](https://media-center.appvizer.com/articles/122417108/cover/com/cover-picture_w227.webp)
![What is an invoice and a bill? Key differences](https://media-center.appvizer.com/articles/121946089/cover/com/cover-picture_w227.webp)
![What’s The Difference Between a Bill and an Invoice? Here’s The Answer!](https://media-center.appvizer.com/articles/121955866/cover/com/cover-picture_w227.webp)