Expense Recognition - The Matching Principle

Brian Krogol
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Alright. So let's continue here with expense recognition. And remember that expenses, these are the value of goods and services that the company that we receive, right, compare that to revenue revenue. We are providing services to others expenses. Were receiving services from others. Okay. So generally what's gonna happen is we got to incur expenses to earn revenue. Right? There's gonna be some sort of expenses we need, we're gonna need sales people. We're gonna need people at the cash register. We're gonna need tutors to be the tutors, right? All sorts of expenses to be able to sell the product to the customer. Okay. So what we use in gap is what's called the matching principle. Okay, The matching principle tells us when to record expenses. So we have the revenue recognition principle for revenue and the matching principle for expenses. Okay, So when do we record expenses? So this is the whole thing with the matching expenses are recorded in the same period as their related revenues. Okay, so the idea here is that we're matching, we're matching the expenses to the revenues. And that makes sense. Right? We earned this this revenue in this period. Well, we want to know in this period. What did it cost us to earn that revenue? Right. We sold these t shirts, but what did it cost us during this period. Right. So we want to consider all the expenses during the period that we earned the revenue as the expenses for that period. So generally the way we want to think about it is when we receive the benefit. Okay. So think about when we receive the benefit and that's when we need to record the expense. Okay? So we're gonna see some examples of different expenses and when we record them as we continue. But just as an example, um let's say you pay for a rental agreement, right? You pay for a rental agreement for a whole year. Well, let's think about if we're just doing the first month of the rental agreement, we don't want to include the whole expense of the whole year, right? We want to only include the one month that's passed, right? So we want to match when we earn when we receive those benefits, right? The benefits of renting the space and using the space. We want to take those expenses as they come. Okay. So we would take uh one month's worth of the expense, so like 1/12 of the expense each month throughout the year. Okay. So we'll see more details about that. But the idea here is that just matching those revenues with the expenses. Okay. So we we want to take the expense when we receive the benefit. So I want to make a quick note about expenses here, is that sometimes students get tripped up with this, that we don't always pay cash, right? Some expenses are gonna be paid in cash, right? Maybe we just had employees work for two weeks and then we paid them and the expense came up and we paid them, right? And we have the cash the expense right there. But other other times it's not just gonna be for paying for something with cash. Sometimes we're using up an asset, such as supplies. Okay? So we might have a supply closet full of office supplies, pens, papers, no pads, clipboards, whatever. And throughout the years we're grabbing stuff out of the closet and using it up. Well, we have to take an expense for all this stuff that we've used up since we used it during this period. We received the benefit of using those supplies during this period. Excuse me. Then we have to take the expense this period. Okay? So some are paid in cash. Some were using up an asset. Sometimes we create a liability right? Sometimes we receive the benefit for something but we haven't paid for it yet. So we'll have to create a liability for that. And I just want to note that it's the occurrence of the event, right? That event being us receiving some sort of benefit that causes the need of the expense record. Okay. It has nothing to do with the cash outflow. Okay. And that's the whole difference between accrual accounting and cash basis accounting is, well, sometimes it does line up with the cash, but not always right. Sometimes we have things like this where we're using up an asset, creating a liability, things like that. Alright, So let's pause here and then try this practice problem on the page