115 CFA
File: Financial Analysis - Reading 21 - 5. Expense Recognition

5. Expense Recognition

e. describe general principles of expense recognition, specific expense recognition applications, and implications of expense recognition choices for financial analysis;

What is the matching principle?
The matching principle states that operating performance can be measured only if related revenues and expenses are accounted for during the same period ("let the expense follow the revenues"). Expenses incurred to generate revenues must be matched against those revenues in the time periods when the revenues are recognized. Expense recognition is tied to revenue recognition.

What are uncollected accounts?
There are always some customers who cannot or will not pay their debts. The accounts owed by these customers are called uncollected accounts.

What is the direct write-off method for uncollected accounts? How is it different from the allowance method?
- Under the direct write-off method, uncollectible accounts are charged to expense in the period that they are determined to be worthless.
- The allowance method says that bad debt expense should be recorded in the same period as the sale to obtain a proper matching of expenses and revenues and to achieve a proper carrying value for accounts receivable.

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