An accountant must be familiar with the concepts involved in determining the earnings of a business entity.
The amount of earnings that is reported for a business entity depends on the proper recognition, in general, of revenues and expenses for a specific time period. In some situations, costs are recognized as expenses at the time of product sale; in other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria.
Instructions
(a) Explain the rationale for recognizing costs as expenses at the time of product sale.
(b) Explain how the matching principle might contradict the definition of an asset. Give examples of where this might arise. 'Wbat should take precedence: the matching principle or the asset definition?
(c) 'Wbat is the rationale that makes it appropriate to treat costs as expenses of a period instead of assigning them to an asset? Explain.
(d) In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense? Explain.
(e) Some expenses are assigned to specific accounting periods based on a systematic and rational allocation of asset cost. Explain the rationale for recognizing expenses in this way.
(f) Identify the conditions in which it would be appropriate to treat a cost as a loss.