He postulate of association of costs and expenses with income, established in the NIF A-1, indicates that an entity must record in the same accounting period the costs and expenses that are related to the income generated, provided that these are accrued, regardless of the payment or collection date.
This principle is essential for the comprehensive income statement to reflect the economic reality of the company, recognizing:
- Income in the period in which it is earned.
- The costs and expenses associated with the process of generating such income.
How is the association made?
The association of costs and expenses with income is carried out:
- Direct identification
Recognize the costs and expenses that were incurred specifically to generate the income for the period.- Example: raw material used in the manufacture of products sold.
- Systematic and rational distribution
Allocate certain costs and expenses over several accounting periods when they are related to long-term revenue.- Example: depreciation and amortization of assets used to produce income over several years.
- Direct recognition in results
When future economic benefits cannot be reasonably identified or quantified, the cost or expense is recorded in the period in which it is incurred.- Example: advertising spending that does not guarantee specific future revenue.
| Form of association | Description | Example | Accounting treatment |
|---|---|---|---|
| Direct identification | The cost or expense is recognized in the same period as the income it helped generate. | Cost of sales of merchandise sold. | Charge to Cost of Sales and credit to Inventories. |
| Systematic and rational distribution | The cost or expense is allocated to multiple periods because it generates revenue during more than one accounting period. | Depreciation of machinery used in production. | Charge to Depreciation Expense and credit to Accumulated Depreciation. |
| Direct recognition in results | Expenses are recorded in the period in which they are incurred when they cannot be linked to future income. | Seasonal advertising spending. | Charge to Advertising Expense and credit to Banks. |
Costs and expenses recognized in the current period
According to the NIF, these include:
a) Those incurred to generate the income of the period.
b) Those that cannot be linked to future income.
c) Those that come from an asset recognized in previous periods and that contribute to generating benefits in the current period (for example, depreciation of machinery).
Practical examples with accounting entries
1. Sale of merchandise and recording of cost of sales
The company sells merchandise for $80,000 plus VAT and its cost was $50,000.
Seat for sale:
Cargo Clients 92,800
Sales Subscription 80,000
VAT credit transferred 12,800
Cost of sales entry:
Charge Cost of sales 50,000
Inventory Credit 50,000
Here the cost of sales is associated with the income generated in the same period.
2. Depreciation of machinery used in production
Machinery with a value of $120,000 and a useful life of 5 years, monthly depreciation of $2,000.
Monthly entry:
Charge Depreciation Expense 2,000
Credit Accumulated Depreciation 2,000
The expense is distributed systematically because the machinery generates income over several periods.
3. Advertising expenditure not attributable to future revenue
The company pays $15,000 for a seasonal advertising campaign.
Seat:
Position Advertising Expense 15,000
Bank Subscription 15,000
The expense is recognized in the current period as it cannot be associated with specific future revenues.
Importance of the postulate
- Ensures that financial statements reflect the correlation between revenue and the resources used to generate it.
- Avoid distortions in results by recording income and costs in different periods.
- Facilitates the analysis of actual profitability by accounting period.
Conclusion
The association of costs and expenses with income It is a key principle for accurate and decision-making accounting. Its correct application involves identifying, allocating, or directly recognizing costs and expenses in the same period in which the related revenue is earned.
0 Comments