Expense recognition principle

Definition

The expense recognition principle dictates that expenses should be recorded in the period in which they are incurred, regardless of when the cash is actually paid. This ensures that expenses are matched with the revenues they help to generate, providing a more accurate picture of financial performance.

5 Must Know Facts For Your Next Test

1. The expense recognition principle is also known as the matching principle.
2. It aims to match expenses with related revenues within the same accounting period.
3. This principle helps in accurately representing a company's financial health and operational efficiency.
4. Accrual basis accounting follows the expense recognition principle closely.
5. Failure to adhere to this principle can result in misstated financial statements.

Review Questions

• What is another name for the expense recognition principle?
• Why is it important to match expenses with revenues within the same accounting period?
• How does the expense recognition principle relate to accrual basis accounting?

Related terms

Revenue Recognition Principle:

One sentence definition stating that revenue should be recognized when it is earned and realized or realizable, regardless of when cash is received.

Accrual Basis Accounting:

An accounting method where revenue and expenses are recorded when they are earned or incurred, not necessarily when cash changes hands.

Matching Principle:

Another term for the expense recognition principle, emphasizing that expenses should be matched with corresponding revenues for accurate financial reporting.