It means "don't try to claim that the property depreciates (loses value over time) faster than the IRS thinks is reasonable". The IRS forms will generally give you guidance or a tax acccountant does that for a living.
Prudence concept tends to understate the profit . depreciation is a tool through which we record our losses , which means that our profit is declining .This means that depreciation is a supportive tool for reducing profit. Matching concept tends to record the expense to the revenue generated from the assets . Hence depreciation fulfils the requirements of both the concepts .
list 5 advantages of prudence concept
Prudence concept
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preparation of account involve estimations, measurements and and valuations according to the conservatism or prudence concept it is a good practice to follow a procedure that tends to understate things.
Depreciation policy is management thing that what depreciation method to use and how much depreciation to charge to each asset. Depreciation concepts are concepts which govern the depreciation process which management cannot change they are universal rules to follow depreciation that how straight line depreciation work etc.
Yes depreciation expense is also an example of matching concept as in this way part of fixed asset cost is apportioned to income statement and depreciation is not used in cash basis of accounting as there cash purchase is fully expensed in purchasing year.
Conservatism is often seen as prudence. People who are conservative do not waste things or use resources unwisely. This may make them seem as if they are prudish.
Explain the concept of depreciation and why organisations need to recognise deprecations expense in the Income Statement.
Advantages: Easy to use Matches Cost to revenues (Matching Concept) Disadvantages: Depreciation can not be charged when the Asset is not in use.
Accruals and prudenceThe accruals concept requires future income (e.g. in relation to credit sales) to be accrued. The prudence concept dictates that caution should be exercised, so that if there is doubt about the subsequent receipt, no accrual should be made.Consistency and prudenceIf circumstances change, prudence may conflict with the consistency concept, which requires the same treatment year after year.In both situations, prudence must prevail.
Depreciation is used to allocate the fixed cost of asset to specific fiscal years during which that fixed asset is used to earn revenue if depreciation is not used then all cost is charged to one fiscal year which is against the matching concept.