Expenses are recognized when they\u2019re \u201cmade\u201d and not when they\u2019re paid for. Well, unless you\u2019re using cash basis of accounting when all you really do is account for all your transaction just when the money is moving from hand-to-hand. Presuming this is not the case, the other method of accounting, called \u201caccrual basis of accounting\u201d asks you to account for expenses when they\u2019re incurred and not when they\u2019re finally paid for. <\/p>\n
So what does it really mean? You usually incur an expense when you receive the service or obtain this certain item you bought. It\u2019s the time you\u2019re consuming the benefits or obtaining the ownership of something and not when you actually pay for it. It\u2019s when risks and rewards of owning the asset come over to you (i.e. when you\u2019re responsible for the transport for an example, you\u2019re already owning it).\u00a0 You get your commercial being aired in the radio in June and you get the invoice for the service in July, in your accounting the expense is recognized in June and not July. It\u2019s always the period you received the service and not when you get the invoice or when you actually pay for it. It may be that you received an invoice for this very same commercial already in advance in May. This expense is still accounted for in June and before that the amount paid is just a prepaid expense on your balance sheet.<\/p>\n
In accrual basis of accounting the expenses are always recognized when they incur (i.e. when you receive the service or obtain substantial ownership) rather than when they\u2019re being paid for. Giving money is hardly an enough reason to say you received something whereas the act that you did says it all. Accounting for expenses in such a manner means your expense is strictly for the period and not relating to any other periods making it true and fair for someone interested in your period\u2019s results.<\/p>\n","protected":false},"excerpt":{"rendered":"
Expenses are recognized when they\u2019re \u201cmade\u201d and not when they\u2019re paid for. Well, unless you\u2019re using cash basis of accounting when all you really do is account for all your transaction just when the money is moving from hand-to-hand. Presuming this is not the case, the other method of accounting, called \u201caccrual basis of accounting\u201d […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,40],"tags":[],"class_list":["post-3490","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-12-expenses"],"aioseo_notices":[],"_links":{"self":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3490","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=3490"}],"version-history":[{"count":3,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3490\/revisions"}],"predecessor-version":[{"id":3495,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3490\/revisions\/3495"}],"wp:attachment":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=3490"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=3490"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=3490"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}