Question

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.

Short answer

Associating cause and effect: These costs are associated with the revenue they assist in generating and listing in concurrent accounting periods. For instance, commission expenses and long-term construction contracts.

Systematic and rational allocation: These costs aid many sessions and are scattered among periods. For instance, truck depreciation and plant and equipment depreciation.

Immediate recognition: These costs have no association with the revenue, do not aid future periods and are listed when they occurred. For instance, advertising expenses and research expenditures.

Step-by-step solution

Meaning of Expense Recognition Principle

The expense recognition principle is a basic accounting principle that states that the firm's expenses should be identified in the period when the revenues linked to those expenses get recognized.

Associating cause and effect

Some costs are identified as expenses dependent on the assumed direct relation with particular revenue. For instance, a sales commission that an employee owes is dependent on the sale amount. Thus, it should list the commission expense in a similar accounting period as the sale. Similarly, the inventory cost provided to a customer should be considered an expense when the sale is identified. Associating cause and effect is also known as the matching principle.

Systematic and rational allocation

Other expense recognition plans are to be implemented without a definite association with cost and revenue items. Some costs may aid many years as these costs cease over time. For instance, a truck may last many years; ascertaining how the cost is determinable in a specific year is difficult. In such circumstances, accountants may use a systematic and rational plan to scatter a part of the overall cost to each period of use. Without the presence of a definite association with cost and revenue item, other

Immediate recognition

These costs cannot be associated with revenue production and do not aid later periods either. These costs are realized as soon as possible. Some costs are linked to the existing accounting periods as expenses as costs undertaken during the period supply no discernible future aids, and costs listed as assets in previous periods no longer supplied discernible aids.