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Every trainee accountant is taught about the twin concepts of 'matching' and 'prudence'. The two provide the foundations upon which many aspects of financial reporting are built. It is the matching concept that is behind many of the assets that firms record on their balance sheets. For example, a new printing press will enable a newspaper firm to produce many thousands of daily papers. But, without the matching concept, it would record a significant loss in the first year of operation as it paid for the press, only to then record a number of more profitable periods as the press was put to use. Capitalising the printing press on the firm's balance sheet, and depreciating it every time it is used, matches the historical cost of purchasing the printing press with the benefit of using it.
Prudence, however, makes sure that the value of the assets on the balance sheet is fair and not over-stated. So, if the newspaper decides to move to a digital-only publication the printing press would become redundant and its only value to the firm would come from either selling or scrapping it. Prudence requires that the value of the asset on the firm's balance sheet is reduced to this net realisable value.
