From the course: Reading Corporate Financial Statements
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Recording expenses using the matching principle
From the course: Reading Corporate Financial Statements
Recording expenses using the matching principle
- If you make annual photo albums or photo books for your family, you understand the temptation to include a moment or two from when they were babies to compare with that child today. But we avoid that temptation. Why? Well, because the annual family album serves the purpose of showing what we did this year. It documents this year's family vacations, this year's first days of school, school concerts, maybe a new car, maybe some broken bones. The income statement is the annual family photo book and it shows only the revenues and expense activities for the reporting period, usually the fiscal year. So far, we've talked about the importance of recognizing the revenue earned this period because we satisfied the contracts performance obligation but here's what you need to remember about expenses. While we may pay for an expense in another period, either by prepaying or after the fact, if that cost or expense was necessary to…
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