Explain the following concepts:a) Prudence, b) Going concern and c) Historical cost

Accounting practices have been developed gradually over the last centuries. All these years people who have never questioned whether alternative methods exists, which are just as valid, operate these procedures automatically. However, the procedures in common use imply the acceptance of certain concepts that are by no means self-evident, nor are they the only possible concepts. Further on we are going to refer to three of the concepts, which are identified as fundamental by the Companies Act 1985: prudence, going concern and historical cost.


The prudence rule (which is sometimes know as conservatism) arises out of the to make a number of estimates in preparing periodic accounts. Managers and owners are often naturally over-optimistic about future events. As a result, there is a tendency to be too confident about the future, and not to be altogether realistic about the entity’s prospects. There may, for example, be undue optimism over the creditworthiness of a particular custom...