Accounting question: when do you recognize expense?

Question

Should expenses be recognized in the period it occurred? Or, according to the matching principle, should expenses be recognized in the same period when you recognize the revenue related? For example, if you occurred legal expenses in FY07 but the legal expenses are related to a revenue that will occur in FY08, when do you recognize the expense, in FY07 or FY08?

Thanks!!!!

Answer 1

For accrual accounting, expenses are recognized when incurred (i.e. electric bill) and revenues are recognized when earned.

Answer 2

If you incurred legal expenses in FY07, you should recognize the expenses also in FY07.  Although you say the revenue will "occur" in FY08, it sounds like it may have been "earned" in FY07 as well and if so you can accrue the revenue and recognize it also in FY07.

Answer 3

for the matching principal, you would match the expense to the revenue what it is reasonable to do so. if the case could be made that this legal expense would have to do with only this portion of the revenue that yes it could be accrued till the following year. I have rarely seen legal expense accrued though, more often the expense that would be match to the revenue would be the cost of goods expense, while legal would fall under Admin costs.

Also this assumes that the business is under the Accrual method of accounting. if the business is operation as a cash business, the legal bills would be expended when they are paid.