What is expense recognition and how is expense matched to revenue?

In the expense recognition video it was told that we divide the expense equally based on how much of the project has been completed so that we know the expense and its corresponding income. This particular point is not very clear. Please explain!

1 Answer(s)


Gaurav, In accrual based accounting/matching principle, expenses are recognized in the period in which their value is recognized. Such expenses are typically prepaid expenses such as rent, insurance etc.

For example lets say your company pays Rs.10,000 in advance to rent a car for 2 months. This is not immediately recognized as an income statement expense, since this expense will produce value for 2 months. So this Rs.10,000 is added as an asset item on the balance sheet called "Prepaid expense". Every month Rs. 5,000 is subtracted from this asset item and added to the income statement expenses.

Is it clear now ?