Miss PLJ Libra Accountancy Professionals
120 East Side 70 The Broadway
Ealing Broadway West Ealing
London London
W5 7KO W13 0SY
T. 020 8544 3703
F. 020 8544 3701
www.libras.co.uk
Sunday, 07 December 2008
Dear Ms PLJ
With reference to your phone call today, I would be delighted to tell you about the prudence and matching concepts:
To be prudent means that you are required to be conservative in the preparation of the books. While the analysis should be as sound as possible, it is always better for you to err on the “low” side. You should be careful therefore not to overstate assets or understate liabilities. That requires recording the expenses and liabilities as soon as possible, but the revenues only when they are realized.
And the matching concept requires all costs incurred in achieving sales for an accounting period to be matched against sales revenues and therefore deducted in the trading profit and loss account. This means that the prepayment of the ‘administration cost’ would appear in the balance sheet as a current asset. And the estimated figure of ‘salaries accrued’ is shown in the balance sheet as a current liability.
The depreciation of the plant and the office equipment is applied by the matching concept. This is done by matching the value of fixed assets 'wearing out' or the bits 'used up' during the accounting period against that period in the profit and loss account. Each year the measure of wearing out [Depreciation] is calculated and deducted from profit in the profit and loss account. This value is also deducted from the cost of the fixed asset and is recorded in the balance sheet as cost less depreciation to give its net book value.
I am afraid that withdrawing most of your profits every year is not very conservative. I advise you to retain your profits and not spend it. The retained profit is then available to use within the business to help with buying new machinery, vehicles, computers and so on or developing the...