INTRODUCTION

We have now devised a double entry accounting system capable of accumulating details about transactions in a form suitable for assembling the summary financial statements. We have so far avoided the problem of matching, i.e., of charging only those costs in a period which were incurred in earning the revenues of that period. This problem has two practical manifestations: firstly, the allocation of short-term expenses between pairs of adjacent periods, and, secondly, the allocation of the cost of long-term (fixed) assets over the periods spanned by their useful lives. Both are aspects of the same central problem, of matching, but the different time scales involved lead to different techniques: accruals and prepayments in the case of short-term expenses, and depreciation in the case of fixed assets. We deal with the short-term problem first.

ACCRUAL AND PREPAYMENT OF SHORT-TERM EXPENSES

It will often be the case that, at the end of a period, some expenses will have been paid which bring benefit in a subsequent period. Equally, some of the benefits derived in the current period may have been paid for in a previous period. This is a situation involving the prepayment of an expense, and it is dealt with by treating the prepayment as an asset at the end of the period in which the payment is made, and then converting the asset to an expense (both are debits, so this is merely a matter of classification) in the following period, in which the benefit is received.