What principle is expenses should be recorded in the period when the revenue is generated?

What principle is expenses should be recorded in the period when the revenue is generated?

Principle of prudence

If a company incurs an expense, how does it record this transaction in the journal? On the one hand, it records the expense and, on the other hand, if it pays it, the corresponding decrease of money will be reflected on the credit side, and if it does not pay it, the corresponding debt will arise. Therefore, it can be deduced that expenses always arise on the debit side. In short, the accounting record of an expense will be:

On the other hand, if a revenue is produced, it will be necessary to record an increase in money or the origin of a collection right, which will be recorded, in any case, on the debit side. At the same time, the income arises on the credit side. The accounting will be:

Now then, in this matter it is extremely important to remember and dwell on some of the mandatory accounting principles listed in the PGC in its first part. Thus, the following are fundamental:

“The profit or loss for the year shall consist of the income for that period less the expenses incurred in obtaining the same, as well as the profits and losses not clearly related to the activity of the company”.

Principle of equity accounting

For example, if we sell to a customer who is going to manufacture chairs the wood he needs to manufacture it, ten kilos of wood, and he takes them to his company and uses them but we agree with him that the payment will be made in three installments, at 30, 60 and 90 days, the income for this sale, for us, is not when he makes those three payments but at the moment we deliver and invoice him the wood, that is to say, at the beginning. For him it will be the same, the expense of the purchase will be computed when he receives the timber and not when he pays for it.

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But in some contracts it is not so simple: there are transaction contracts which, containing certain clauses, make it very difficult to determine precisely when the actual flow of goods and services takes place.

To solve this difficulty our General Accounting Plan (RD 1514/2007, of November 16, hereinafter PGC) describes in detail and for each case the requirements that every transaction must meet in order to have to account for the corresponding income or expense, and it does so in a concrete and casuistic manner, which achieves much greater legal certainty.

Accrual Principle

Eric L. Kohler in his book “Accountant’s Dictionary” defines Accounting Principles as “A body of doctrine associated with accounting that serves as an explanation of current or ongoing activities and as a guide in the selection of conventions or procedures”.

GAAP (Generally Accepted Accounting Principles) are a set of general rules and standards that serve as accounting guidelines to formulate criteria for the measurement of equity and the reporting of the assets and economic elements of an entity. GAAP are parameters for the preparation of financial statements based on uniform methods of accounting technique.

Fairness between conflicting interests must be a constant concern in accounting, since those who make use of or use accounting data may find themselves faced with conflicting interests. It follows that financial statements must be prepared in such a way as to reflect, fairly, the various interests at stake in a given enterprise.

Accrual basis IFRS

The accrual basis is an accounting rule that establishes that transactions or economic events are recorded when they occur, regardless of the date of payment or collection.

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The objective of the accrual principle is that the annual accounts of a company clearly reflect the equity, financial position and economic results achieved by the company in that period, allocating expenses and income to the period to which the annual accounts refer and affect the same, regardless of the time of their collection or payment.

In the case of subsidies, it should be noted that when a subsidy is granted, the monetary collection of the subsidy takes place, but its allocation to the income statement should not be made until the subsidy is definitive: when the requirements established in the grant of the subsidy are fulfilled.