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)