Why is cost recognized as an expense at the time of a sale?
Is it because a company recognizes the efforts(expense) put in to accomplish the sale(revenue)?
Try some of the cost accounting l inks here:
in accounting why is cost an expense a th e ti me of a sale
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Cost is recognized as an expense at the time of a sale because of the matching principle in accounting. The matching principle states that expenses should be recognized in the same accounting period as the related revenues that they help generate.
When a sale occurs, revenue is recognized because the company has earned income from the sale. However, in order to determine the true profit or loss from the sale, it is necessary to deduct the cost associated with producing the goods or services being sold. This is known as the cost of goods sold (COGS) or cost of sales.
By recognizing the cost as an expense at the time of the sale, the company matches the expense with the revenue it helps generate. This provides a more accurate representation of the company's profitability for a specific period. It also ensures that the financial statements give a true and fair view of the company's financial performance.
To calculate the cost of goods sold, a company may consider factors such as the cost of raw materials, direct labor, and any additional overhead costs directly attributable to the production of the goods or services being sold. Accumulating and tracking these costs accurately helps in determining the cost to be recognized as an expense when the sale occurs.