ferrarilover wrote:Afternoon Lee,
So, do I correctly infer from your above example that we go to all this trouble, all this time and expense and complexity, in order to protect Mr Bean from himself and stop him buying companies he doesn't understand? Juice doesn't seem worth squeeze, if you ask me.
The example was just one way of explaining the concept of why we do things. There are many reasons for preparing accounts the way they are. One of them being the above example - many ordinary people buy shares and need an easy way telling how well/badly the company in which they buy/own the shares are doing.
Another reason is comparability. Accounts are all prepared using the same principals so you can easily compare two different companies. With your method you could have large distortions between companies and it would be difficult to identify any differences between the two.
Accounts should also be consistent to clearly identify how well a business is improving or how poorly it is performing. To do this you need to apply the same principals year on year. Other you get wild fluctuations that are unexplainable.
Very large companies have to prepare a statement of cash flows in their accounts, showing the movement in the year to cash (which takes out estimated figures such as depreciation) which is essentially what you would like to show. Torquay aren;t large enough theat they are required to have this disclosure.
The concept is a matching principal - you want to match relevant expenses to relevent income. An asset will generate income over a period, so you match the expense for a period. Same as if we received a sponsorship deal for three year but were paid all the money in a lump sum. The income would be split equally over the next three years accounts.
