The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 14

LONG-TERM ASSETS AND DEPRECIATION, AMORTIZATION, AND OTHER EXPENSES

A Brief Review of Expense Accounting

To start this chapter, a refresher on expense accounting in the financial statement is warranted and based on the timing for recording expenses—to record expenses in the correct period, nether too soon or too late. The two overriding principles for recording expenses are as follows:

• First, match expenses with sales revenue: Cost of goods sold expense, sales commissions expense, and any other expense directly connected with making particular sales are recorded in the same period as the sales revenue. This is straightforward; all direct expenses of making sales should be matched against sales revenue. It would be foolhardy to put revenue in one period and the expenses of that revenue in another period. You agree, don’t you?
• Second, match other expenses with the period benefited: Many expenses are not directly identifiable with particular sales, such as office employees’ salaries, rental of warehouse space, computer processing and accounting costs, legal and audit fees, interest on borrowed money, and many more. Nondirect expenses are just as necessary as direct expenses. But nondirect expenses cannot be matched with particular sales. Therefore, nondirect expenses are recorded in the period in which the benefit to the business occurs.

As we look back through the book thus far, we see that Chapter 4 explains that the recording of an expense involves the decrease of ...