An expense is recognized on an income statement. That\u2019s a fact, right. Well, what almost always raises questions, is the proper period the expense needs to be disclosed in. It\u2019s not always this easy, you know \u2026 What I am trying to do now, is bring some insight to this situation. You have an expense and you\u2019re not sure whether it needs to be in current, next or even prior period.
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\nThe first and to be honest the most crucial question you need to answer to yourself is \u2018when did this event which this expense relates to, happen?\u2019 All expenses relate to some activities, conditions, situations or events, so as a result, they thrive the need to incur an expense. This thrive is the exact moment an expense needs to be recognized. The minute it becomes evident that some amounts of resources need to be given away, it means that an expense has been incurred obviously. The real payment may occur in future, but in our accrual based accounting world, the expense is recognized to reflect the reality of this period. The reality means in this case all the income and expenses that relate to this particular period reflecting the actual results the company performed. <\/p>\n
The fact when the event actually occurred is a tough one to answer sometimes however. It may very well be a situation where the agreement was formed in say 2011, but the talks were already started in 2010. In case certain promises and actions were taken already in 2010, it may have been an expectation of some party that the agreement shall be made and fulfilled, even if it\u2019s completed in 2011. Generally speaking the rule is as follows: if contractual or factual situation sees that some resources need to be given away, the expense has been incurred. When \u2018contractual\u2019 is a clearer term, the \u2018factual\u2019 is again a tougher one. The rule is that when a third party has the right or reason to believe that your company will pay something, the expense has been incurred and as a result needs to be recognized.<\/p>\n
Be very careful with those expenses and invoices that come in just before or after the year end. When the question of proper period is not that relevant during the year, it\u2019s important just at the year end. Why? Because you need to present your financial statements and have them present the financial position of your company in a true and fair way. <\/p>\n","protected":false},"excerpt":{"rendered":"
An expense is recognized on an income statement. That\u2019s a fact, right. Well, what almost always raises questions, is the proper period the expense needs to be disclosed in. It\u2019s not always this easy, you know \u2026 What I am trying to do now, is bring some insight to this situation. You have an expense […]<\/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-1695","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-12-expenses"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/1695","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=1695"}],"version-history":[{"count":3,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/1695\/revisions"}],"predecessor-version":[{"id":2525,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/1695\/revisions\/2525"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=1695"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=1695"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=1695"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}