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There are different accounting strategies for when you recognize income/expenses. Say you land a long term contract to provide a service for 5 years and you ne
by alexbeloi 9y ago
There are different accounting strategies for when you recognize income/expenses.
Say you land a long term contract to provide a service for 5 years and you need to buy extra hardware to fulfill this service, you can choose to expense the hardware immediately in the first year while you let the earnings come in over the next 5 years. In the first year you would be taking a huge loss (on paper), and in the following four years you would see larger than average profits (on paper).
Alternatively, you could acknowledge the full value of the contract immediately. Or another alternative is to expense the hardware over time.
I'm not an accountant, but this analogy is my basic understanding of the flexibility that companies have.
- URSpider94 9y agoCompanies don’t actually have flexibility on this. There are Generally Acceptable Accounting Principles (GAAP) that govern how you must handle various kind of expense or profit. In the case you provided, the revenue must be booked when it is payable under the contract - if it’s invoices in yearly installments, then it comes onto the books at that point. The capital expense for the equipment must be depreciated over its useful life, not when it is purchased.