How are period expenses recognized and measured?

Answer 1

RECOGNITION OF PERIOD EXPENSES

Many expenditures benefit specific accounting periods and do not benefit specific revenue transactions. The firm therefore cannot link the timing of recognition of the expenses associated with these expenditures to revenue recognition from specific sales. A common example of a period expense is the cost of management, including the president's salary, accounting and information systems costs, and support activity costs such as legal services, employee training, and corporate planning. These administrative costs do not relate directly to products produced or sold, and the firm recognizes them as expenses when it consumes their benefits in the accounting period. The firm treats them, therefore, as period expenses.

Another example of a period expense is the cost of marketing or selling products, for example, salaries and commissions of the sales staff and costs to produce catalogs and other sales literature. The firm recognizes those costs as expenses in the accounting period when it consumes them. The firm incurs some marketing costs, such as advertising, with the intent of providing future benefits. U.S. GAAP and IFRS preclude the recognition of these costs as assets. The reasoning for this treatment results from the asset recognition criterion that the firm be able to measure the future benefits with sufficient reliability.

EXPENSE MEASUREMENT

Expenses measure the consumption of assets during an accounting period, so the basis for
expense measurement is the same as the measurement of the consumed asset. If the firm
measures an asset at acquisition cost on the balance sheet, it also measures expenses based
on the acquisition cost of the asset consumed.