The expense recognition principle requires that for any reporting period, following the recognition criteria, income is determined in accordance with the principle of accrual then for this period, the expenses that arise in the course of receiving income for the period are determined. This is the second step in the income recognition process. Once income for a reporting period has been measured and recognized, the expense recognition principle is applied to measure and recognize expenses for the same period. To know which expenses should be optimized and where a company can spend more, proper accounting is a must. Although it is always desirable to reduce the amount of expenses a company incurs, some expenses prove to be very reasonable cash spendings that increase the company’s revenue significantly. To achieve this, one must be familiar with the expense recognition principle.Įxpenses can result from the supply or production of goods, the provision of services, or other activities of the business.
Accordingly, their accurate accounting and proper planning allow both the owners and investors to ultimately achieve their financial goals of increasing profits. The expenses of the enterprise affect the financial result of the enterprise, while the goal of any enterprise is to make a profit. Revenue reporting affects the decision-making of internal and external stakeholders. Through analysis and accounting, organizations themselves plan and control their expenses. It is these aspects of the activity that are most important for all interested parties – the owners of the organization, investors, and the government. Consequently, in the course of the organization’s activities, expenses are always an inevitable part of it. In the modern business world, all enterprises, regardless of their type and form of ownership, maintain accounting records of business operations in accordance with the current legislation.
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