Explanation:

The concept of prudence is applied here, which is also known as the principle of conservatism. This concept states that while preparing financial statements, a cautious approach should be taken, and uncertainties and losses should be accounted for immediately.

Valuation of closing stock:

- Closing stock refers to the unsold goods or products that are left in a business at the end of an accounting period.
- These goods need to be valued, and the value is based on the lower of cost or market price.
- Cost refers to the actual cost incurred by the business to purchase or produce the goods, including all direct and indirect expenses.
- Market price refers to the current selling price of the goods in the market.

Application of prudence concept:

- The prudence concept suggests that when valuing closing stock, a cautious approach should be taken and uncertainties should be accounted for immediately.
- This means that if the market price of the goods is lower than the cost, the closing stock should be valued at the market price, even if it results in a loss for the business.
- This approach ensures that the financial statements reflect a true and fair view of the business's financial position, even if it means reporting lower profits or higher losses.

Conclusion:

The application of the prudence concept ensures that uncertainties and losses are accounted for immediately, even if it results in a lower valuation of closing stock. This approach ensures that the financial statements reflect a true and fair view of the business's financial position, which is the primary objective of accounting.