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| Friday, June 07, 01:16:44am | [ Login ] [ Contact Forum Admin ] [ Main index ] [ Post a new message ] [ Search | Check update time | Archives: 1, 2, 3, 4, 5, 6, 7, 8, 9, [10] ] |
| Subject: Doctrine of conservatism. | |
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Author: Provisions |
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Date Posted: Thursday, January 23, 03:06:05am Assessing Company performance--provisions. ----------------------------------------------------------- Provisions are charges an entity makes against profits to allow for expenses which have been incurred but for which the amount and the payment date can only be estimated. In other words, they are estimates of specific commitments. For example, in topic two we saw that entities are required ke provision in their accounts for doubtful debts. Provisions are made for such items as depreciation, long service leave and warranty. ----------------------------------------------------------- All provisions relating to assets are deducted (doubtful debts, inventory obsolesence, depreciation and amortisation) with all other provisions being included under current or non current liabilities. Sometimes provisions may be used to reduce profits. In a good year, an entity may over provide, thus creating a cushion which can then be used in a bad year to absorb any fall in profits.Provisions which allow a greater amount of flexibiliy in the estimation procedure, tend to be set on a fairly pessimistic note. This is part of the doctrine of conservatism which simply means accountants do not like to take the risk of reporting profit before they are reasonably certain the entity will earn it. There can be a tendency to record all possible costs as early as possible and revenues as late as possible. Entities doing very well tend to be conservative in their accounting, whereas entities having difficulties are tempted to abandon the doctrine of conservatism. These are the entities which are more likely to fail. ----------------------------------------------------------- 11/3/2002 ----------------------------------------------------------- "The ERG Directors believe this very conservative accounting treatment will permit the ERG financial statements to be more transparent." ----------------------------------------------------------- [ Next Thread | Previous Thread | Next Message | Previous Message ] |