What does it mean for an expense to be recognized in the period in which it is incurred?

• A. Expenses are recorded when they are paid
• B. Expenses are recorded when they are billed
• C. Expenses are recorded when they are owed
• D. Expenses are recorded at year end

Answer: (C)

Recognizing an expense in the period in which it is incurred means that the expense is recorded in the financial statements when the related goods or services are received, regardless of when the payment is made. This concept adheres to the matching principle, which is a foundational component of Generally Accepted Accounting Principles (GAAP). The matching principle dictates that expenses should be recognized in the same period as the revenues they help to generate, ensuring that the financial statements reflect the true economic activity within that reporting period.

In this context, when an expense is recognized as incurred, it indicates that the obligation to pay for goods or services has been established, even if the cash payment has not yet taken place. Therefore, recording the expense when it is owed aligns with GAAP’s requirement for accurate financial reporting and ensures that financial results accurately reflect the operational activities during the reporting period. This process allows financial statement users to assess the company’s financial position and performance more effectively.