Financial Accounting 101: Expense Recognition / "Matching" Principle - Accrual Basis Accounting

This is a detailed description of the Expense Recognition “Matching” Principle in Accrual Basis Accounting. We go through the three situations created by this principle and the journal entries that go along with them.

According to the Matching Principle, expenses should be recognized (measured / recorded in the accounting system) in the same period as the revenues to which they relate. In short, we match the expenses to the period where they helped to earn the revenue.

All companies expect to receive cash in exchange for goods and services – it’s why they’re in business! But the timing of when they receive this cash does NOT dictate when revenues are recognized. What matters is when the sale/service is performed.
Three possible cases exist:

1. Cash BEFORE expense
When we pay for the expense but have not incurred it:
Dr. Prepaid Expense
Cr. Cash
After we have incurred the expense we can recognize it:
Dr. Expense
Cr. Prepaid Expense (kill)

2. Cash WITH expense
When we pay cash and incur the expense at the same time (no timing difference exists)
Dr. Expense
Cr. Cash

3. Cash AFTER expense
When we incur the expense (and can recognize it), but still need to pay the bill:
Dr. Expense
Cr. Account Payable
After we have paid cash to our vendor:
Dr. Account Payable (kill)
Cr. Cash

Don't complicate these timing differences. Start with 2 questions:
-Did I pay cash?? - Easy to plug into a journal entry
-Did I incur the expense?? - Let's us know if we recognize it

Then ask:
-Do I owe my vendor (if I haven’t paid my bill) - then it's a liability
-Does my vendor owe me (if I pre-paid)? - then it's an asset