In QuickBooks 2011 for Dummies, pg. 24, there are listed several generally accepted accounting principles. I see that

Expense Principle The expense principle states that an expense occurs when the business uses goods or receives services. In other words, the expense principle is the flip side of the revenue principle...simply receiving the goods means that you've incurred the expense of the goods.

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Matching Principle The matching principle is related to the revenue and the expense principles. The matching principle states that when you recognize revenue, you should match related expenses wiht the revenue. The best example of the matching principle concerns the case of businesses that resell inventory. In the hot dog stand example, you should count the expense of a hot dog and the expense of a bun on the day when you sell that hot dog and that bun. Don't ocunt the expense when you buy the buns and the dogs.

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It seems to me that the Matching Principle is at odds with the Expense Principle. Is the Expense Principle used for book-entry, or just for "matching" somehow?

When should I count expenses for hot dog buns (a la Expense Principle)- when I buy the buns, or when I sell a hot dog (with bun) (a la Matching Principle)?

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    GAAP are not often invoked in handling Personal Finance issues and thus this seems somewhat off-topic to me. – Dilip Sarwate Dec 9 '13 at 23:14
  • Welcome Charles. Can you edit this question a couple of ways? First, please tag it with your location (as is our custom). Secondly, we are personal finance, so business questions only as they directly relate to your personal finances. At the moment, I'd label these as academic and off topic. – MrChrister Dec 10 '13 at 0:36
  • I added a tag as you requested. Is there a better StackExchange venue that you can suggest? Thanks. – Charles Pehlivanian Dec 10 '13 at 1:22
  • @Dilip this may help some small business probably... Although those who don't use CPAs to help them, will probably not know what's going on anyway... – littleadv Dec 10 '13 at 6:06
  • This is a small-business question (mine!). I will comply with your decision but I have a possible answer given already. – Charles Pehlivanian Dec 22 '13 at 1:18

You recognize expense when you sell the hot dog. When you pay for the buns you have inventory, which is an asset. When you sell the hot dog - you have cost of goods sold, which is the expense.

Expense principle says that you recognize expense when you use the product. You use the buns when you actually sell the hot dog, not before.

The matching principle is also honored because you recognize expense of the buns at the time of recognizing revenue of the hot dog.

  • Ah..ok. So I don't "use" the buns right away. If I pay for a service, it is incurred right away as it is used right away. Right? – Charles Pehlivanian Dec 22 '13 at 1:20
  • Generally, although you can "prepay" service as well – littleadv Dec 22 '13 at 19:54

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