Under the prudence concept, gains should only be recognised when they have actually been made.

Under the prudence concept, gains should only be recognised when they have actually been made.

• A. A Gains should be recognised when cash is received
• B. B Gains should be recognised when they have actually been made
• C. C Gains should be recognised as soon as they are probable
• D. D Gains should never be recognised

Answer: (B)

Prudence means you don’t boost income or assets ahead of the facts; gains are not recognised until they are real. In accounting, a gain should be recognised only when it has actually been realised—that is, when the economic benefit has been earned and can be measured reliably. It isn’t enough that a gain might occur or that cash has merely arrived; recognition should wait until the gain is concrete. This conservative approach prevents overstating profits and ensures that the financial statements reflect only gains that have truly occurred. So the correct approach is to recognise gains only when they have actually been made.

Prudence means you don’t boost income or assets ahead of the facts; gains are not recognised until they are real. In accounting, a gain should be recognised only when it has actually been realised—that is, when the economic benefit has been earned and can be measured reliably. It isn’t enough that a gain might occur or that cash has merely arrived; recognition should wait until the gain is concrete. This conservative approach prevents overstating profits and ensures that the financial statements reflect only gains that have truly occurred. So the correct approach is to recognise gains only when they have actually been made.