Hello,
I had some questions regarding expense recognition. I understand that there are 3 methods: associating cause-and-effect, systematic and rational allocation, and immediate recognition. Here are the questions for each one:
1. Associating cause-and-effect: a given transaction results in a specific revenue account being credited and a specific expense account being debited (in separate journal entries). So the revenue and the expense are linked to each other, and should be reported in the same period. Is that correct?
2. Systematic and rational allocation: all good. No questions on this one.
3. Immediate recognition: this involves "costs that have no discernible future benefit and that involve the acquisition of goods/services (which INDIRECTLY help generate revenues) that are immediately consumed." Can someone please explain the "no discernible future benefit" part, and also the part about the good/service being consumed immediately? (examples of each would be good) Here's one interpretation of mine: if it HAD a discernible future benefit (ie. you could measure for how many periods the cost would benefit you, and the revenues that would result in each of the benefited periods), you would capitalize or defer the cost to an asset account, and then expense that cost in the periods in which that asset was being used in the business' operations to earn revenue (eg. depreciation expense, insurance expense, amortization expense, etc...). But if there is NO discernible future benefit, you make the entire cost an expense in the period the cash was paid or the liability was incurred.
Thanks very much
I had some questions regarding expense recognition. I understand that there are 3 methods: associating cause-and-effect, systematic and rational allocation, and immediate recognition. Here are the questions for each one:
1. Associating cause-and-effect: a given transaction results in a specific revenue account being credited and a specific expense account being debited (in separate journal entries). So the revenue and the expense are linked to each other, and should be reported in the same period. Is that correct?
2. Systematic and rational allocation: all good. No questions on this one.
3. Immediate recognition: this involves "costs that have no discernible future benefit and that involve the acquisition of goods/services (which INDIRECTLY help generate revenues) that are immediately consumed." Can someone please explain the "no discernible future benefit" part, and also the part about the good/service being consumed immediately? (examples of each would be good) Here's one interpretation of mine: if it HAD a discernible future benefit (ie. you could measure for how many periods the cost would benefit you, and the revenues that would result in each of the benefited periods), you would capitalize or defer the cost to an asset account, and then expense that cost in the periods in which that asset was being used in the business' operations to earn revenue (eg. depreciation expense, insurance expense, amortization expense, etc...). But if there is NO discernible future benefit, you make the entire cost an expense in the period the cash was paid or the liability was incurred.
Thanks very much