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Accrual Concept and Matching Concept
Accountancy
Accrual Concept - For Expense - We need to record an expense, when the activity is completed and not when the payment is made. Is this true always sir to understand in simple terms? An income for one is expense for other, hence a person who would receive the income would record his income when it becomes receivable (right to receive) and the other person would record expense (as he needs to pay). Will always both party record at same time, a right to receive for one and right to pay for other occur same time always or can it be different? Matching Concept - Sir, what concept is used to identify the expenses which are required to earn the income for matching against the income. For eg - Certain expenses like rent, salary, electricity charges are always considered as expenses and certain expenses are added to inventory while calculating the value of unsold goods for a particular period and later when the goods are sold these are adjusted as expense. Why are we differentiating between expenses as one would directly be expense and other would go to asset and later use matching concept? As any company makes expenses to earn income, why can't we directly reduce the expense only when income is earned? [Video Time Stamp: 00:02] Video Details ------------- Accounting - CA Foundation (New) Accounting Concepts, Principles And Conventions #3. Accounting Concepts - Part 2
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While one party records income when it becomes receivable and the other records an expense when it becomes payable, the timing might not always match perfectly. A simple example could be when a party recognises a liability in a court case (probability of payment > 50%) but the other party may not recognise income since the outcome is not certain. Direct expenses like raw materials are added to inventory (asset) and matched to revenue when sold. Inventory or purchases are not fully expensed since it creates an asset which will give benefit in future. Ongoing expenses like rent or salary are expensed immediately because their benefit cannot be directly matched to specific income. These are called period expenses.
Then the formula here is, the expense which can't be matched to specific income are to be considered as period expense and has to be taken to P&L. Only those expenses that can be matched directly against the income has to considered for matching when we recognize the income. Is this period expense a separate accounting concept? and will this concept come in further chapters for having more clarity?
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Vignesh VenkatesanThen the formula here is, the expense which can't be matched to specific income are to be considered as period expense and has to be taken to P&L. Only those expenses that can be matched directly against the income has to considered for matching when we recognize the income. Is this period expense a separate accounting concept? and will this concept come in further chapters for having more clarity?
Your understanding is correct. Period expense is a term used to denote those expenses which are charged to PL in the period in which they are incurred. For example Advertisement expenditure.
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