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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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An accountant must be familiar with the concepts involved in determining earnings of a company. The amount of earnings reported for a company is dependent on the proper recognition, in general, of revenue and expense for a given time period. In some situations, costs are recognized as expenses at the time of product sale; in other situations, costs are recognized as expenses or losses based on other criteria.

Required:

  1. 1. Explain the rationale for recognizing costs as expenses at the time of product sale.
  2. 2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.
  3. 3. Sonic expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on this basis.

1.

To determine

Identify the cost recognizing rationale for expenses at the time of the sale of product.

Explanation

Accrual accounting:

The method of accounting that recognizes revenues when they are received before being earned, and recognizes expenses before they are paid, is known as the accrual accounting.

The company following accrual accounting will recognize the revenue in the same period as the service is provided and expense is recognized only in the accounting period when the cost is incurred. The objectives of accrual accounting are to ensure appropriate measure of financial position and performance in the respective accounting period.

The expenses need to be recorded as per the accrual accounting when the costs are actually incurred...

2.

To determine

Identify the underlying rationale on the appropriateness of treating costs as expenses of a period instead of assigning costs to an asset.

3.

To determine

Identify the underlying concept for recognizing expenses on the basis of systematic and rational allocation basis.

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