7.6. Scanning the Expense Horizon
Recording sales revenue and other income can present some hairy accounting problems. As a matter of fact, the Financial Accounting Standards Board (FASB) — the private sector authority that sets accounting and financial reporting standards in the United States — ranks revenue recognition as a major problem area. A good part of the reason for putting revenue recognition high on the list of accounting problems is that many high profile financial accounting frauds have involved recording bogus sales revenue that had no economic reality. Sales revenue accounting presents challenging problems in some situations. But in my view, the accounting for many key expenses is equally important. Frankly, it's damn difficult to measure expenses on a year-by-year basis.
I could write a book on expense accounting, which would have at least 20 or 30 major chapters. All I can do here is to call your attention to a few major expense accounting issues.
Asset impairment write-downs: Inventory shrinkage, bad debts, and depreciation by their very nature are asset write-downs. Other asset write-downs are required when an asset becomes impaired, which means that it has lost some or all of its economic utility to the business and has little or no disposable value. An asset write-down reduces the book (recorded) value of an asset (and at the same time records an expense or loss of the same amount). A write-off reduces the asset's book value to zero and removes it from the ...