Question

1. Explain the rationale for recognizing costs as expenses at the time of product sale.
2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the sosts to an asset?
3. Some expenses are assigned are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the reason

Answer 1

) Matching Cost against Revenue principles stipulate that a revenue generated must have an associated cost to it. As & when a revenue is
recognized, so does the cost.

2) A cost might be incurred specific for the period and can't be put to assets because its purpose ends at the time of the spend. Some however needs to be accumulated in an asset account because its purpose hasn't ends. A raw material purchase for processing is not period cost but rather an asset, same thing for a merchandise inventory. It will only become an expense when it;s sold.

3) Cost for which you have enjoy the benefits of/ have incurred because the purpose of it have been exercised have to be recognized in the same period. For example, if you paid a rental for the office building in Jan for a period of 1 year. At the end of the January, 1/12 portion of the cost needs to be charged in Jan because you have enjoyed the space provided/ the rental for Jan have expired.