Journal entries are often a bane to the existence of accountants. They have to enter them at the perfect time to avoid throwing off past fiscal periods. And it takes so many of them just to record all the changes that are taking place. All this time, they have to follow the expense recognition principle, specialized laws, and much more.
However, they are absolutely necessary for the appropriation of expenses when a company chooses to use any of the generally accepted accounting principles regarding expense recognition. Read on to find out more about the importance of using this crucial method of assigning expenses to specific periods of time.
What Is the Expense Recognition Principle?
The expense recognition principle refers to the system of recording expenses to the appropriate period of time. All expenses tie to the revenue that a company receives. So they have to be recorded at the same time that they occur. This can be a little confusing to understand for those who are used to a cash-based accounting system where all expenses and revenue are recognized immediately.
But in an accrual-based accounting system, a business can wait to record revenue or expenses for several months. It can also divide up between several fiscal periods. This is possible if the revenue stream trickles in over a large period of time instead of allot to the business in a one lump sum.
Who Needs to Focus on the Expense Recognition Principle the Most?
There are three types of companies that need to be sure that they carefully follow this accounting principle when they record their transactions.
- The first one is any company that already has an accrual-based accounting system.
- The second one is a business that chooses to follow the generally accepted accounting principles.
- Then, the last type is a business that hopes to have an audit from an outside CPA or tax professional. This is because most of them will not touch any bookkeeping work until the transactions appear in the records properly.
How Much Do Companies Spend to Apply the Expense Recognition Principle?
Applying any accounting principle is an ongoing process that has to be continuous. It has to happen during the entire length of time that a company stays in business. You also have to review it on a regular basis to ensure its accuracy, which takes more than one pair of eyes. In fact, a trustworthy accountant will often go so far as to encourage those who oversee their work to check over the journal entries and other transactions that they do as a way of creating a checks and balances system. This takes a little more time, but it reduces the likeliness of fraud.
Sometimes, accountants also might need to work in collaboration on the expense recognition principle when there are complicated transactions to figure out. This commonly occurs when you purchase a new asset. The asset will result in the need to record a multitude of expenses over a long period of time.
Because of all of these factors, most businesses can expect to spend several hundred dollars on a monthly basis on maintaining the expense recognition principle. This amount of money pertains to the portion of an accountant’s salary that allots to the specific tasks that must be performed for it. If more than one accountant is necessary, then this amount will be much higher though.
3 Ways to Reduce Expenses That Come with the Accounting Principle
One of the best parts about the expense recognition principle is that when you use it correctly, it ensures that a company has more accurate accounting records. This helps to prevent many financial and tax problems that end up costing a company a fortune to fix. But still, some smaller companies may struggle with coming up with the cash that is necessary to maintain it consistently enough for it to be effective. So to help, the following is a list of three ways to reduce the costs associated with the expense recognition principle:
1. Work on Time Management
The first way that a company can reduce their costs is to focus on creating a time management system that increases efficiency. That way, you will have to spend less time on the overall accounting process.
This will decrease the amount of payroll expenses that come with it. Creating the system will require everyone from the financial processes of the company to work together as a team. Consequently, they all perform in collaboration of the new system though.
2. Consider Professionals
Next, a company can consider hiring an outside agency to do the work for them. More often than not, this is the best option because they will only charge for the time it took them to complete the accounting tasks.
This reduces the overall costs of the process the most. So, a company will not have to pay for the payroll taxes, lunch breaks, and other expenses that are common with an accountant that holds a permanent staff position.
3. Get a Good System
And lastly, for those who want to keep their financial information in-house, a good accounting software program will be helpful. It should be a type that you can access on a network though. That way, any of the qualified members of the staff can work on it from any of their offices.
This will help reduce the costs of the expense recognition principle because accounting software programs of a poor quality have limited functions. So, a person has to spend more time completing the tasks to get the job done.
As you can see, the expense recognition principle is important for maintaining an accurate system of recording expenses in the right time period. Without it, a company will end up with misconstrued financial information. Consequently, this could have an impact on their taxes. It takes a lot of time to do the work involved in the process. Therefore, it helps for a company to have a time management system in place. They might also want to hire outside help or invest in a better accounting software program.
Finally, feel free to share this information with your friends on your social networking sites. Or print it out for a reference sheet for others who might need it.