expense

Examples of expense in the following topics:

• Differences Between Accrued and Deferred Expenses

  • Accrued expenses and deferred expenses are two examples of mismatches between when expenses are recognized under the matching principle and when those expenses are actually paid.
  • An accrued expense is a liability that represents an expense that has been recognized but not yet paid.
  • A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred.
  • So the business will record a $12,000 deferred expense asset.
  • As a result, the business must recognize $1000 in expenses each month and decrease the value of the deferred expense asset by that amount.

• Operating Expenses, Non-Operating Expenses, and Net Income

  • Operating expenses and non operating expenses are deducted from revenue to yield net income.
  • An operating expense is the ongoing cost of running a product, business, or system.
  • Paper, toner, power, and maintenance costs represent operating expenses.
  • In business, operating expenses are day-to-day expenses such as sales and administration.
  • Operating expenses, non operating expenses and net income are three key areas of the income statement.

• Expense Recognition

  • Technically, an expense is an event in which an asset is used up or a liability is incurred.
  • In terms of the accounting equation, expenses reduce owners' equity.
  • This makes the timing of expenses and revenues very important.
  • Thus, the accounting method the business uses depends on when an expense is recognized.
  • Under the accrual system, an expense is not recognized until it is incurred.

• What Is Depreciation?

  • Depreciation expense also affects net income.
  • Such expense is recognized by businesses for financial reporting and tax purposes.
  • Depreciation expense reduces an accounting period's income even though the expense does not require a cash or credit payment.
  • generated by expenses involved in the earning of the accounting period's revenues.
  • Depreciation expense can be calculated using a variety of methods.

• Importance of Recognition and Measurement

  • Deferred expense (prepaid expense) allows matching costs of products paid out to those not received yet.
  • Deferred expenses, or prepaid expenses or prepayment, are an asset.
  • Deferred expenses share characteristics with accrued revenue.
  • Prepaid expenses are not recognized as expenses, but as assets until one of the qualifying conditions is met resulting in a recognition as expenses.
  • Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses (cost of goods sold), but as assets (deferred expenses), until the actual products are sold.

• The Importance of Timing: Revenue and Expense Recognition

  • Revenue is recognized when earned and payment is assured; expenses are recognized when incurred and the revenue associated with the expense is recognized.
  • The assets produced and sold or services rendered to generate revenue also generate related expenses.
  • Accounting standards require that companies using the accrual basis of accounting and match all expenses with their related revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period.
  • By tying revenues and expenses to the completion of sales and other money generating tasks, the income statement will better reflect what happened in terms of what revenue and expense generating activities during the accounting period.
  • Explain how the timing of expense and revenue recognition affects the financial statements

• Adjustments

  • Expiration of insuranceInsurance expense 200 Prepaid insurance 200b.
  • Expiration of insuranceInsurance expense 200 Prepaid insurance 200b.
  • The revenue recognition principle states that income and expenses must match.
  • The adjusting entry would credit the asset (e.g. supplies) account and debit a related expense account (e.g. supplies expense)
  • The entry for bad debt expense can also be classified as an estimate.

• Reversing Entries

  • Most often, the entries reverse accrued revenues or expenses for the previous period.
  • To get the expense correct in the general ledger, an adjusting entry is made at the end of the month A for half of the interest expense.
  • This adjusting entry records months A's portion of the interest expense with a journal entry that debits interest expense and credits interest payable.
  • At the beginning of the month B that expense is reversed via a reversing entry.
  • The entry credits interest expense and debits interest payable.

• Current Guidelines for Expense Recognition

  • For an expense to be recognized, the obligation must be both incurred and offset against recognized revenues.
  • An expense is incurred when the underlying good is delivered or service is performed.
  • Under the matching principle, the expense related to the raw material is not incurred until delivery.
  • Generally, an expense being incurred is insufficient for it to be recognized.
  • Explain how accrual accounting uses the matching principle for expense recognition

• Differences Between Accrual-Basis and Cash-Basis Accounting

  • Accrual accounting does not record revenues and expenses based on the exchange of cash, while the cash-basis method does.
  • Just like revenues, the recording of the expense is unrelated to the payment of cash.
  • An expense account is debited and a cash or liability account is credited.
  • The cash method of accounting recognizes revenue and expenses when cash is exchanged.
  • Just like revenues, expenses are recognized and recorded when cash is paid.