Question :

Accountants must be familiar with the concepts involved in determining the profits of companies. The amount of profits of a firm is dependent on the proper recognition of revenue and expenses for a given accounting period. In some situations, costs are recognized as expenses at the time of product sales. In other situations, costs are recognized as expenses or losses under other conditions.

Required:

a What is the rationale for recognizing costs as expenses at the time of product sale? Explain. (5 marks)

b What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain in detail. (8 marks)

c Identify the conditions under which it would be appropriate to treat a cost as a loss. (5 marks)

d Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of the asset cost. Explain in detail the underlying rationale for this kind of accounting treatment. (7 marks)