WHUTChapter 5Expense MeasurementTheIncome Statementiioo100310rO01O101001313000
WHUT Chapter 5 Expense Measurement; The Income Statement
LearningObjectivesThe difference between expense andexpenditure;Howthe expenses of a period are measured;The matching concept;The meaning of items reported on an incomestatement;Methods of analyzing an income statement.WHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Learning Objectives The difference between expense and expenditure; How the expenses of a period are measured; The matching concept; The meaning of items reported on an income statement; Methods of analyzing an income statement
1.Expenseand ExpenditureAn expense is reported on the incomestatement.An expense is a cost that has expired, wasused up, or was necessary in order to earnthe revenues during the time periodindicated in the heading of the incomestatementWHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school 1. Expense and Expenditure An expense is reported on the income statement. An expense is a cost that has expired, was used up, or was necessary in order to earn the revenues during the time period indicated in the heading of the income statement
1.Expense and ExpenditureAn expenditure is a payment ordisbursement. The expenditure may be forthe purchase of an asset, a reduction ofa liability, a distribution to the owners,or it could be an expense.An expenditure to eliminate a liability is notan expense, while expenditures foradvertising, salaries, etc. will likely berecorded immediately as expenses.WHUTAccountingdepartmentof managementschool
WHUT Accounting department of management school An expenditure is a payment or disbursement. The expenditure may be for the purchase of an asset, a reduction of a liability, a distribution to the owners, or it could be an expense. An expenditure to eliminate a liability is not an expense, while expenditures for advertising, salaries, etc. will likely be recorded immediately as expenses. 1. Expense and Expenditure
2.Matching(expenserecognition)Expense recognition is traditionally tied torevenue recognitionThis practice - referred to as the matchingprinciple- dictates that expenses be matched withrevenues in the period in which efforts areexpended to generate revenues.WHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school 2.Matching (expense recognition) Expense recognition is traditionally tied to revenue recognition This practice – referred to as the matching principle – dictates that expenses be matched with revenues in the period in which efforts are expended to generate revenues
Expenses are costs used up by thecompany in performing its main operationsThe matching principle requires thatexpenses be reported on the incomestatement when the related sales are madeor when the costs are used up (rather thanin the period when they are paid),WHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school 6 Expenses are costs used up by the company in performing its main operations. The matching principle requires that expenses be reported on the income statement when the related sales are made or when the costs are used up (rather than in the period when they are paid)
2.Expired costsandUnexpired costs To understand the various approaches for matchingexpenses and revenues on the income statement, it isnecessary to examine the nature ofexpensesExpired costs are costs that will generate revenuesonly in the current period and are therefore reportedas operating expenses on the income statementUnexpired costs are costs that will generate revenuesinfuture accounting periods and are recognized asassets.WHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school 2. Expired costs and Unexpired costs To understand the various approaches for matching expenses and revenues on the income statement, it is necessary to examine the nature of expenses - Expired costs are costs that will generate revenues only in the current period and are therefore reported as operating expenses on the income statement - Unexpired costs are costs that will generate revenues in future accounting periods and are recognized as assets
2.Expired costs and Unexpired costsUnexpired costs become expenses in 2 ways:Cost of goods sold - Costs carried as merchandiseinventory are expensed as cost of goods sold in theperiod in which the sale occurs - so there is a directmatching of expenses with revenues.Operating expenses - Unexpired costs becomeoperating expenses through use or consumption orthrough the passage of time.WHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Unexpired costs become expenses in 2 ways: - Cost of goods sold – Costs carried as merchandise inventory are expensed as cost of goods sold in the period in which the sale occurs – so there is a direct matching of expenses with revenues. - Operating expenses – Unexpired costs become operating expenses through use or consumption or through the passage of time. 2. Expired costs and Unexpired costs
3.TypesofAdjustingEntriesPrepaidAccruedCosts/ExpensesRevenueAccruedUnearnedRevenueExpensesWHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school 3. Types of Adjusting Entries 9 Prepaid Costs/Expenses Accrued Expenses Unearned Revenue Accrued Revenue
Prepaid Expenses - expenses paid in cashand recorded as assets before they are usedor consumed.Accrued Expenses - expenses incurred butnot yet paid in cash or recorded(liability)WHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Prepaid Expenses - expenses paid in cash and recorded as assets before they are used or consumed. Accrued Expenses - expenses incurred but not yet paid in cash or recorded(liability)