Question

1. ABC Company experienced the following events in July. Using the matching concept, deduce which of these events represent expenses for July.

(a) Received orders for goods with prices totaling $40,000 to be delivered in August. This is not an expense this is an income as it is order received.

(b) Paid warehouse employees $65,000 for work performed in July. Warehouse employee salary paid for July is an expense for the month of July.

(c) Sold goods with a cost of $30,000 during July. Sold goods is not an expense it is an income.

(d) Paid $750 for local radio advertising aired in July and prepaid $1,000 for local advertising to be aired in August. Paid $750 for local radio is an expense for the month of July and $1,000 prepaid expenses is related to August month.

(e) Purchased additional inventory for $20,000.

Answer 1

• As per matching concept and accrual concept, expenses are recognised in the period they are incurred or accrued, whether actual cash has been paid or not.
• Based on this, answers have been provided below.
• Note: Some of the part has already been answered.
• Answers

(a) Received orders for goods with prices totaling $40,000 to be delivered in August. This is not an expense this is an income as it is order received.
This is incorrect. Actually, its neither an expense nor an item of revenue (yet) because its just an ‘order’. Order is not a financial transaction and is not to be recorded.

(b) Paid warehouse employees $65,000 for work performed in July. Warehouse employee salary paid for July is an expense for the month of July.
Yes, this is correct.

(c) Sold goods with a cost of $30,000 during July. Sold goods is not an expense it is an income.
This is incorrect. The Cost of Goods Sold is an item of ‘expense’ for the period in which those goods are sold. Hence, expense = $ 30,000

(d) Paid $750 for local radio advertising aired in July and prepaid $1,000 for local advertising to be aired in August. Paid $750 for local radio is an expense for the month of July and $1,000 prepaid expenses is related to August month.
Correct. Expense for July = $ 750, Prepaid Expenses [Assets] = $ 1000

(e) Purchased additional inventory for $20,000.

Not an expense item. Cost of inventory is added to Inventory balance [Asset account]. When this inventory is sold, then Cost (or expense) is recognised.

• Hence, Expenses for Jul =65000 + 30000 + 750 = $ 95,750