Generally Accepted Accounting Principles question

Question

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)?

Answer 1

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.