How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, 8th Edition

CHAPTER 10

DEPRECIATION EXPENSE AND PROPERTY, PLANT, AND EQUIPMENT; INTANGIBLE ASSETS

Brief Review of Expense Accounting

Financial statement accounting is concerned with the timing for recording expenses—to record expenses in the correct period, neither too soon nor too late. The two guiding principles for recording expenses are:

1. Match expenses with sales revenue: Cost of goods sold expense, sales commissions expense, and any other expense directly connected with making particular sales are recorded in the same period as the sales revenue. This is straightforward; all direct expenses of making sales should be matched against sales revenue. It would be foolhardy to put revenue in one period and the expenses of that revenue in another period. You agree, don’t you?

2. Match other expenses with the period benefited: Many expenses are not directly identifiable with particular sales, such as office employees’ salaries, rental of warehouse space, computer processing and accounting costs, legal and audit fees, interest on borrowed money, and many more. Nondirect expenses are just as necessary as direct expenses. But nondirect expenses cannot be matched with particular sales. Therefore, nondirect expenses are recorded in the period in which the benefit to the business occurs.

Chapter 3 explains that the recording of an expense involves the decrease of an asset or the increase of a liability. Chapter 6 explains the use of the inventory asset account to hold the cost of products that ...