right so we’ve learned about the
criteria that have to be satisfied in order to recognize revenues in the
income statement and we also know why financial authorities have come up with
these rigid rules revenue reporting plays a critical role and impacts the
decision-making of both internal and external stakeholders in this lesson
we’ll talk about the recognition of expenses as you can imagine similar to
what we saw for revenues there is a set of rules that regulates the correct
period in which expenses should be recorded financial authorities cannot
allow companies to manage this process on their own without supervision because
this will create the temptation to manage the recording of expenses in
periods that are more favorable to the company’s management for example a
manufacturing company could be tempted to register the cost of the raw
materials it uses in January 2017 rather than in December 2016 this will have a
direct impact on the profitability of the company in both 2016 and 2017 the
company will be able to report higher profitability margins and thus will
appear more attractive to investors in order to impede such behavior financial
authorities apply the matching principle whenever possible the matching principle
is an important accounting concept stating that expenses incurred to
generate revenue are recognized in the same period as the revenue so according
to the matching principle if the manufacturing company makes sales in
December 2016 it will have to record the cost of raw materials in the same period
however we should always remember that not all of a company’s expenses can be
tied to revenues these are the so-called period costs examples of period costs
that a firm can have are administrative costs and utility bills these are
expensed in the period when they are incurred in our next lesson we will look
at long-lived assets and how they are depreciated and amortized