Question

Pollution

Focus plc caused some minor pollution in a local river on 29/12/X6. The water authorities would probably not be able to trace the waste back to Focus plc but the company prides itself on having always cleaned up any pollution for which it is to blame. The estimated cost of the clean-up is £10,000.

The accountant proposes simply charging the £10,000 as an expense in 20X7 when the clean-up work will be done.

State whether you agree with the accountant’s proposal regarding the matter mentioned above. You should explain your reasons for agreeing or disagreeing and explain any alternative treatments that you believe the accountant should use.

Answer 1

No, I do not agree with the accountant’s proposal regarding charging expense in 20X7.

Explanation:

Expenses should be recognised in income statement based on principle of accrual and conservatism. As per principle of accrual all expenses should be recognised in books based on when they accrue and not when they are actually paid. As per principle of conservatism all estimated looses should be provided for in the books. In the given case there is an accrual of expense as a result of past event which has already happened. There is a reasonable estimate of cost available 10,000 pounds. Hence the firm should recognise the expenses in 20X6 and provide for the same as a Provison. Providing for expenses as per accrual concept gives the true and fair of the financial statements.