Expense recognition and matching
Objective: Match expenses to the right period.
Recommended first: Accrual basis vs cash basis
Expenses are recognized when incurred — when the resource is used to run the business. Prepaid costs wait as assets; unpaid costs already used are accrued as liabilities. Long-lived assets are spread over their useful life through depreciation.
Expense recognition asks when the business used the resource. Rent for March is a March expense whether paid in February, March, or April. Prepayments wait as assets; unpaid costs are accrued; equipment is spread over its life. This keeps each period's profit comparable.
Check your work
- When was the resource used?
- Is a prepaid portion still an asset?
- Are unpaid but used costs accrued?
Expenses that benefit many periods, such as an annual software license under a capitalization policy, may be prepaid and spread out; small items may be expensed immediately under a stated threshold. In each exercise the rule is stated; apply it consistently so month-to-month comparisons stay meaningful.
$180 of March electricity is billed in April.
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | $180.00 | |
| Utilities Payable | $180.00 |
Common mistakes
✗ Expensing an annual insurance payment in one month.
✓ Spread it across the months covered.
Guided practice
Use hints freely here.
Item 1 of 1
Expenses: cash basis vs accrual basis
In June a business (1) used and paid for $1,300.00 of services, (2) incurred $450.00 of wages to be paid in July, (3) prepaid $1,400.00 for insurance covering July–December, and (4) paid $500.00 of May's utility bill. Compute June expenses under each basis.
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Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 4
Accrue an unbilled utility
Peak Form Fitness Studio's meter reading shows $335.00 of electricity used in March. The bill will arrive in April. Record the Mar 31, 2026 adjustment.
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Key terms
- Matching
- Recording expenses in the same period as the revenue they help earn.
- Accrued expense
- A cost incurred but not yet paid or recorded.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.