Expense Recognition Principle
This accounting principle says that expenses should be recognized, matched and considered as to be used by the business when all the relevant revenues in the same period are recognized. If we do not recognize expenses in the period in which revenues recognized, then expenses related to the current period will be overstated and for the next period will be understated. For Example, an entrepreneur makes a payment of Rs.80000 to Marketing Manager for the selling of goods for Rs.700000 for the period of next two months. Now, expenses of Rs.80000 should be recognized and matched with the revenues of Rs.700000 in the next 2 months when all the revenues will be recognized. But, if we match the expenses in the first month, then in the first month the entire expenses are matched with the revenues and expenses are increased by the amount of Rs.80000 that is the amount of payment paid to Marketing Managers. So expenses are overstated in the first month. While it wil...