what period expense is difficult to match with revenue. explain why?
The period expense that is generally difficult to match with revenue is "Non-cash expenses," also known as depreciation and amortization expenses. These expenses represent the allocation of the cost of long-term assets (such as buildings, machinery, or patents) over their useful life.
Non-cash expenses are challenging to match with revenue because they do not involve the direct outflow of cash during the period in which they are incurred. Instead, they reflect the reduction in the value of an asset over time or the amortization of intangible assets. As a result, they do not have a direct correlation to the revenue generated by a company in the same accounting period.
To understand why non-cash expenses are difficult to match with revenue, let's take an example. Suppose a company buys a piece of equipment for $100,000 with an expected useful life of 10 years and no salvage value. According to generally accepted accounting principles (GAAP), the company must allocate the cost of that equipment over its useful life as an expense.
Using the straight-line depreciation method, the company would recognize an annual depreciation expense of $10,000 ($100,000 divided by 10 years). However, in the year of purchase, the company may not generate enough revenue to offset this expense fully. This creates a mismatch between the timing of the expense recognition and the corresponding revenue earned during that period.
In subsequent years, the company may generate more revenue, which would help offset the non-cash expense. But it's important to note that the timing of when the expense is recognized on the income statement and when the cash is paid is not necessarily the same.
This disconnection between non-cash expenses and revenue recognition arises because accounting principles aim to provide a more accurate representation of a company's financial performance and the value it derives from its assets over time, rather than solely focusing on cash inflows and outflows.
Therefore, while non-cash expenses like depreciation and amortization are critical for providing a comprehensive view of a company's financials, their timing makes it difficult to precisely match them with the corresponding revenue generated in a specific period.