Finance Accounting Assignment: Product vs Period Expense

Accounting- Income statement
Name
Institution
Date
Part I
Revenue recognition
Revenue recognition focuses on the timing and measurement of revenues, and transactions are identified as recording revenues and related expenses based on the revenue recognition basis (Gibson, 2010). Under the accrual basis, revenue is recognized when it is earned, and the income is matched with the expenses (Edwards, Hermanson, Ivancevich, & Pearlman, 2013). The revenue recognition approach recognizes all the earnings earned and expenses in the financial year, to provide a clearer picture of the company’s financial position. Proper revenue recognition reflects the profitability of a reporting entity, and stakeholders make decisions based on financial performance, and especially for the investors. Revenues increase net assets, and this is distinguished from other assets that do not generate net assets. The exchange of goods and services for the assets, which occur as part of business or core operations is considered revenues. Similarly, a loss that decreases the net assets and is not part of the core business is not an operating expense.
Product versus period expense
Reporting entities must separate the period and product expenses as misclassifying the costs may be an attempt to minimize the taxable income. Product expenses are the costs directly attributed to manufacturing including the direct labor and direct materials (Edwards, Hermanson, Ivancevich, & Pearlman, 2013). These expenses may also be incurred indirectly as manufacturing overheads, and the costs then pass through the inventory accounting. The product costs are recorded in the cost of goods sold in the income statement, and as part of the inventory asset in the balance sheet. Period costs are charged and recorded when the expenses are incurred, selling, marketing, and general and administration costs are period expenses. Hence, costs or running a business, which are not carried in inventory are considered period expenses, and these costs are incurred in all areas of the value chain except the production/ manufacturing department. As such the period costs are expensed in the period when they are incurred.
The matching concept and accounting for revenues and inventory.
The revenue realization concept involves the time when revenues are recognized, and when recognizing the costs, they have to be associated with the recognized revenue (Gibson, 2010). The matching principle then helps to determine the revenue, which is then matched with the costs against the revenue. Similarly, the cost of inventory matched with the revenue, and when there are sales of revenue the costs of inventory are matched (Edwards, Ivancevich, & Pearlman, 2013). There are other costs that are not directly connected with revenues, and the reporting entities the adopt policies to allocate such costs like research and development costs. The prepaid expenses are deducted from the costs, like the prepaid income, since they are not part of the financial year. In calculating the inventory figure reported in the income statement purchased inventory are added to the opening inventory, and the closing inventory is deducted to determine the inventory level reported as the part of...