Expense recognition

Definition

Expense recognition is the accounting principle that dictates when expenses should be recorded in the financial statements. It ensures expenses are matched with corresponding revenues to reflect accurate profitability.

5 Must Know Facts For Your Next Test

1. Expense recognition adheres to the matching principle, ensuring expenses are recorded in the same period as the revenues they help generate.
2. Under accrual accounting, expenses are recognized when incurred, not necessarily when paid.
3. Failure to properly recognize expenses can distort a company's financial performance and lead to inaccurate financial reporting.
4. Certain costs must be capitalized rather than expensed immediately if they provide future economic benefits beyond the current period.
5. Adjusting journal entries at the end of an accounting period often involve expense recognition for accrued liabilities and prepaid expenses.

Review Questions

• What principle does expense recognition adhere to?
• When are expenses recognized under accrual accounting?
• Why might certain costs be capitalized instead of expensed immediately?

Related terms

Accrual Accounting: An accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.

Matching Principle: An accounting concept that dictates that companies report expenses at the same time as the revenues they help to generate.

Capitalization: The process of recording a cost as an asset, rather than an expense, because it provides benefit over multiple periods.