How to Read a Financial Report, 10th Edition

10DEPRECIATION AND AMORTIZATION EXPENSE, AND FIXED AND OTHER LONG-TERM ASSETS

Overview of Expense Accounting

Before plowing into the nature of depreciation and amortization expense and its connections in the balance sheet, I offer a broad review of expenses in general. Financial statement accounting is especially concerned with the timing of recording expenses. The main goal is to record expenses in the correct period, neither too soon nor too late, so that profit for the period is as accurate as possible.

The two guiding principles for recording expenses are:

1. Match expenses with sales revenue: Costs of sales revenue 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 relatively 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 nondirect expenses include 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 they cannot be matched with particular sales. Therefore, nondirect expenses are recorded in the period ...