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Rakhi Vasavada
Rakhi Vasavada , Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4420
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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what method of expense recognition is used in junk yard business,

Customer Question

what method of expense recognition is used in junk yard business, accounting for cars bought and sold for their parts?
Submitted: 4 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 4 years ago.

Dear Friend,

 

The matching principle governs expense recognition. It states that all costs that were incurred to generate the revenue appearing on a given period's income statement should appear as an expense on the same income statement. In other words, we should match expenses against revenues. Revenues are first recognized and expenses are then matched with those revenues. By doing this, the income statement contains measures of both accomplishment (revenue) and effort (expenses), thereby enabling an assessment of firm performance.

 

In your business, the best way of recognizing expense would be using "Associating Cause and Effect" This method implies that a clear and direct relationship exists between the expense and the associated revenue. Cost of goods sold is a good example. A retail store certainly cannot generate sales revenue without consuming inventory. Salespersons' commissions are another example. Because commissions are usually paid as a percentage of sales revenue, commission expense is tied directly to revenue.

 

Coming to your business, this theory matches. This is because, in order to have revenue selling parts, you WILL have to first incur expenditure on acquiring old cars and this expenditure can be directly related to this cause.

 

I hope this helps...

Warm Regards,

Customer: replied 4 years ago.
I want to know if i should write off a portion of the vehicle’s cost to expense each year. I'm a little confused as to exactly how that should be done. Where are you getting your sauthoritative support, ie., fasb codification standards?
Customer: replied 4 years ago.

*authoritative support

Expert:  Rakhi Vasavada replied 4 years ago.

Dear Friend,

 

The vehicles being direct inputs, I am unsure if you can expense it each year in portion. I am opting out so that other expert may assist you with.

 

Warm Regards,

Customer: replied 4 years ago.
Relist: Incomplete answer.
Customer: replied 4 years ago.
Relist: Incomplete answer.