Accounting Business Reporting for Decision Making

234 Accounting: Business Reporting for Decision Making

Prior to the Conceptual Framework and the definitions of income and expense contained in it, consider-

able emphasis was placed on the matching principle when recognising income and expenses in a reporting

period. The matching principle required matching the income earned with the expenses incurred in a

reporting period. Applying the income and expense definition and recognition criteria — summarised in

figure 6.4 — will generally involve a matching of income and expenses. This occurs when:

• items of income and expense result directly and jointly from the same transaction (e.g. the concurrent

recognition of sales and cost of sales)

• income is matched with progressive performance (e.g. a borrower will recognise the interest expense

associated with a loan throughout the loan’s life even if all the interest is to be paid at the loan’s maturity)

• expenses are matched with the entity’s productivity (e.g. the recognition of depreciation on a system-

atic basis according to the asset’s useful life is allocating the depreciation expense according to asset

productivity).

NO

INCOME EXPENSE

Do not recognise in the

statement of prot or loss.

Recognise

Do not recognise in the

statement of prot or loss.

Increases in assets or decreases in

liabilities resulting in increases in

equity, other than those relating

to contributions from holders of

equity claims.

Does the recognition provide relevant information to

users? Factors to consider are:

• uncertainty as to whether the asset/liability exists


• low probability of inflow/outflow of economic benefits


• measurement of uncertainty.

Decreases in assets or increases in

liabilities resulting in decreases in

equity, other than those relating

to distributions to holders of

equity claims.

NO

NO

YES YES

YES

NO

FIGURE 6.4 Summary of the definition criteria and recognition process for income and expenses

VALUE TO BUSINESS

•   Measuring the profit or loss of an entity necessitates identifying, measuring and recognising all

income and expense items attributable to the reporting period.

•   Income is defined as increases in assets or decreases in liabilities that result in increases in equity

for the entity, other than those relating to contributions from holders of equity claims.

•   Expenses are defined as decreases in assets or increases in liabilities that result in decreases in

equity for the entity, other than those relating to distributions to holders of equity claims.