Is it logical? Yes, because then we will get the correct profit from the sales, as the difference between all the proceeds from the sale and all the expenses. This is where the matching principle comes in handy, which will require that not only the revenue from December sales be reflected in accounting records for December, but also the rental expense. However, rent payments need to be paid not month by month, but with a delay: that is, December rent will need to be paid in January next year. In simple words, it means that the reporting expenses should fall into the same periods in which the income for which these expenses were incurred is reflected.Ī company, let’s say, rented a new outlet for one month due to a peak in sales during December. One of the most famous accounting principles is the matching principle for revenue and expenses. To account for the expenses of the period, temporary expense accounts are added to the chart of accounts. These costs are apportioned evenly over the periods during which the assets are expected to generate a profit.
This is the second step in the income recognition process. Once income for a reporting period has been measured and recognized, the expense recognition principle is applied to measure and recognize expenses for the same period. To know which expenses should be optimized and where a company can spend more, proper accounting is a must. Although it is always desirable to reduce the amount of expenses a company incurs, some expenses prove to be very reasonable cash spendings that increase the company’s revenue significantly. To achieve this, one must be familiar with the expense recognition principle.Įxpenses can result from the supply or production of goods, the provision of services, or other activities of the business. Accordingly, their accurate accounting and proper planning allow both the owners and investors to ultimately achieve their financial goals of increasing profits. The expenses of the enterprise affect the financial result of the enterprise, while the goal of any enterprise is to make a profit. Revenue reporting affects the decision-making of internal and external stakeholders.
Through analysis and accounting, organizations themselves plan and control their expenses.
It is these aspects of the activity that are most important for all interested parties – the owners of the organization, investors, and the government. Consequently, in the course of the organization’s activities, expenses are always an inevitable part of it.
In the modern business world, all enterprises, regardless of their type and form of ownership, maintain accounting records of business operations in accordance with the current legislation.