Expense recognition principle

Definition

Expense recognition principle dictates that expenses should be recorded in the period in which they contribute to revenue. This principle ensures that financial statements accurately reflect the company’s financial performance.

5 Must Know Facts For Your Next Test

1. The expense recognition principle aligns with the matching principle, which matches expenses with related revenues.
2. Expenses are recognized when incurred, not necessarily when paid.
3. This principle helps in assessing true profitability during a specific accounting period.
4. In job order costing, expenses are recognized as jobs are completed and matched with revenues from those jobs.
5. In process costing, expenses are recognized continuously as production processes incur costs.

Review Questions

• What is the main purpose of the expense recognition principle?
• How does the expense recognition principle differ between job order costing and process costing?
• Why is it important to match expenses with revenues?

Related terms

Matching Principle: Requires that expenses be matched with revenues in the period in which efforts are expended to generate those revenues.

Accrual Accounting: An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when cash transactions occur.

Revenue Recognition Principle: Dictates that revenue should be recognized when it is earned and realizable, regardless of when cash is received.