[u] According to Prudence (conservatism) concept [/u]we should not anticipate any income and should provide any possible losses, In other words ‘recognize all possible losses and anticipate no gain’.
Now question arise, why we create provision for discount on creditor (anticipate profit), which is credited to profit & loss A/c? 8)
The One Says:
First of all it is not that conservatism dictates us not to recognize any income, only that one should recognize income when it is certain to accrue.
Further RFDC is provided for only when such a discount is virtually certain. The key conceptual differential is between reasonable certainty for losses and expenses and virtual certainty for incomes and gains.
Therefore the recognition of RFDC when it is in congruence with the aforesaid principle would not be in contradiction to prudence/conservatism.
Hope this helps.....
CAclubindia
