How is the prudence principle applied to the accounting for construction contracts?
A)If a loss is expected on the contract, all of this loss is immediately recognized.
B)Only a proportional amount of revenue and expenses are recorded each year.
C)If a loss is expected on the contract, a loss is recognized in the current year based on the degree of completion.
D)Under this principle, good news is reflected earlier than bad news.

Question

Quizplus · Accepted Answer

The prudence principle in accounting dictates that potential expenses and liabilities should be recognized immediately, but potential revenues only when they are realized. Therefore, if a loss is expected on a construction contract, the entire expected loss is recognized immediately to reflect the potential financial impact as soon as it is anticipated.

How Is the Prudence Principle Applied to the Accounting for Construction