Expense recognition |
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Many
kinds of expenses are incurred to create a product or service. As a
rule, accounting generally tries to match costs and revenues in an accounting period.
This is fairly straightforward when the costs are closely tied to the
manufacture or delivery of particular units being sold. Costs are
either reflected as a straight expense, or capitalized into inventory.
Unfortunately, many costs are poorly tied to revenue units within periods. For example, we know that some products will be returned, but we don't know which ones. Some products might harm their users, but we don't know if they really will or when. In other instances, we can estimate a future cost based on current activities, like reclamation of land we are mining, but we are relying on a different set of managers to actually incur and manage those costs. |
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