Generally Accepted Accounting Principles question?

Question

In _QuickBooks 2011 for Dummies_, pg. 24, there are listed several generally accepted accounting principles. I see that **Expense Principle** The *expense principle* states that an expense occurs when the business uses goods or receives services. In other words, the expense principle is the flip side of the revenue principle...simply receiving the goods means that you've incurred the expense of the goods. [more explanation] **Matching Principle** The *matching principle* is related to the revenue and the expense principles. The matching principle states that when you recognize revenue, you should match related expenses wiht the revenue. The best example of the matching principle concerns the case of businesses that resell inventory. In the hot dog stand example, you should count the expense of a hot dog and the expense of a bun on the day when you sell that hot dog and that bun. Don't ocunt the expense when you buy the buns and the dogs. [more explanation] It seems to me that the Matching Principle is at odds with the Expense Principle. Is the Expense Principle used for book-entry, or just for "matching" somehow? When should I count expenses for hot dog buns (a la Expense Principle)- when I buy the buns, or when I sell a hot dog (with bun) (a la Matching Principle)?

Answer 1

Simply receiving the goods, doesn't mean you've incurred the expense. You've incurred the liability for the goods! yes, so in the case of any kind of Inventory or operating supplies, you would Debit Inventory, or Debit Operating Supplies and you would credit Accounts Payable. But the decision to expense the inventory or supplies, comes through the utilization of them, not simply their acquisition. So with respect to your question about the hot dog bun (inventory) you would debit Cost of Goods Sold. Credit Inventory when you SELL the Hot Dog! (at which point you would also recognize revenue (Debit Cash, Credit Revenue). simple?