![]() There are several methods for computing depreciation. ![]() The term amortization is used whenever the long-lived assets are intangible and have a finite, useful life. Besides, companies should recognize estimated warranty expenses in the periods of sale, and update the expenses as indicated by experience over the life of the warranties.ĭepreciation and Amortization: depreciation describes the process of systematic allocation of the costs of long-lived assets over the period during which the long-lived assets are expected to provide any economic benefits. Warranties: using the matching principle, companies are required to estimate the amount of future expenses which result from warranties. This estimate is recorded as an expense on the income statement, not as a direct reduction of revenue. Specific Expense Recognition Applicationsĭoubtful accounts: using the matching principle, once revenue is recognized on a sale, a company is required to record an estimate of how much of the revenue will ultimately be uncollectible. As a result, the costs of the newest items purchased will flow into the costs of goods sold first, as if the items purchased most recently were sold first. Under LIFO, the newest goods that are purchased or manufactured are presumably sold first while the oldest goods to be purchased or manufactured are assumed to remain in inventory. The last in, first out (LIFO) method can also be used to assign costs under US GAAP, but not under IFRS. Under the weighted average cost method, the average costs of goods available for sale are assigned to the units sold and the units remaining in inventory. As a result, the ending inventory would include the most recent purchases. ![]() This implies that the items that were purchased first are sold first. The cost of goods in the beginning inventory and the cost of the first items purchased or manufactured flow into the cost of goods sold first. The FIFO method assumes that the oldest goods that are purchased or manufactured are sold first while the newest goods purchased or manufactured remain in inventory. IFRS and US GAAP, however, permit the use of the first in, first out (FIFO) method, and the weighted average cost method to assign costs. Under the specific identification method, the inventory and cost of goods sold are based on their physical flow. Matching Applied to Inventory and Cost of Goods Sold Period costs are expenditures that less directly match revenue, and are reflected in the period when a company has the expenditure or incurs a liability. Matching requires that a company recognizes the cost of goods sold in the same period as revenues from the sale of the goods. Under the matching principle, a company recognizes some expenses (for example, cost of goods sold) whenever the associated revenues are recognized, thereby matching expenses and revenues. The IASB Conceptual Framework describes expenses as “decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.” General Principles of Expense RecognitionĪ company recognizes expenses in the period that it consumes the economic benefits associated with the expenditure, or loses some previously recognized economic benefit.
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