Consider a real estate developer who starts a tract of 10 homes in May of the current year. During the year, the developer incurs material, labor, and overhead costs amounting to $1 million (assume $100,000 per house). By the end of December, none of the houses has been sold.

Required:

How much of the $1 million in construction costs should appear in the developers income statement for the current year?

The answer is none.

These costs are not related to any revenue earned by the developer during the current year. Instead, they are related to future revenue the developer will earn when the houses are eventually sold.

Therefore, at the end of the current year, the $1 million of product costs should appear in what of the developers financial statement, and what is the name of that account?

As each house is sold, $100,000 will be deducted from sales revenue as cost of goods sold. This way, the developers income statements in future periods, what is this principle called?