Broad Buddies: The Expense Principle

Source: https://www.youtube.com/watch?v=1UQXfnp8YlM

The expense principle states that whatever expenses that occur in a single period should be recorded alongside whichever revenue to which they match up with. For example, let’s say a company pays $100,000 for their merchandise, which the company sells the following month for $150,000, with the expense recognition principle, the $100,000 would not be acknowledged until the following month, alongside its related revenue of $150,000.

Things like income taxes, can be effected by this expense principle. An income tax is a tax set in place by the government, so they receive a set, specific amount from a person, or company’s yearly income. To relate this back to the earlier example, the company’s income tax in the first month would be underpaid since the expenses were higher than revenue (because they paid $100,000 but did not have any recorded revenue with it), and the following month would be overpaid when the expenses were low and revenue was higher.