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Two accounting concepts or conventions could clash or there could be inconsistency between them. Give two examples of such situations and explain how the inconsistency should be resolved.

      

Two accounting concepts or conventions could clash or there could be inconsistency between them.
Give two examples of such situations and explain how the inconsistency should be
resolved.

  

Answers


Mutiso
Examples of instances where two accounting concepts could clash or there
be inconsistency and how such inconsistency would be resolved.

1. Prudence Vs. Realisation
When calculating the profit of an organization the amount of sales used is both the credit and
the cash sales. This would seem to be a contradiction of the prudence concept, since we are not
sure that the credit sales will actually be realized.
However, the realization concept is to the extent that you should recognize incomes when it is
reasonably certain that they will be realized.
As such in this case the prudence concept will override the realization concept.

2. Consistency Vs. Prudence
The consistency concept is to the extent that various items in the financial statements should be
treated in the same way in various accounting periods. These thus means if a valuation of stock
is done in historical cost, then that should be the standard method of use for several years after.
However, according to the prudence concept, if the stocks net realizable value is less than its
historical cost then the net realizable value should be used instead of the Historical cost.

3. Prudence Vs. Substance over Form
In a situation where we are purchasing some goods on hire purchase and the goods have not
been fully paid for. The true state of the goods is that we do not own them as they are recorded
in law in the names of the purchase vendor.
This would pose a conflict where prudence dictates that the item should not be recorded in our
books since we do not seem to be of the opinion that it should be recorded as it represents the
substance of the transaction.
In such a case the substance over form concept would override and as such the item would be
recorded in our books.
Mutiso answered the question on November 16, 2018 at 05:34


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