Revenue, expenses, and asset accounting
Clear definitions and practical examples to help you understand the numbers and decisions.
Revenue recognition
Revenue recognition determines when and how much consideration from customers is reported as revenue. The answer follows the transfer of promised goods or services and the applicable contract terms, not simply when an invoice is issued or cash is collected. It requires finance to identify the contract, promised performance, transaction price, and evidence that performance occurred.
Read the explanationPerformance obligation
A performance obligation is a promise in a customer contract to transfer a distinct good or service, or a distinct series of substantially similar goods or services. Identifying the obligation determines what the company must deliver before it earns revenue. A contract price may cover several obligations, so invoicing one bundled amount does not establish that all revenue is earned at once.
Read the explanationContract asset
A contract asset is a right to consideration for goods or services already transferred to a customer when the right depends on something other than the passage of time. It is not simply an invoice that has not been issued. When the company has an unconditional right to payment except for waiting until a due date, the balance is a receivable instead.
Read the explanationContract liability
A contract liability is an obligation to transfer goods or services to a customer for which the company has already received consideration, or has a right to consideration, before completing the related performance. It is often called deferred revenue, but the contract-liability label focuses on the remaining customer promise. It is released to revenue as performance occurs.
Read the explanationCost of goods sold
Cost of goods sold, or COGS, is the cost of inventory or products that were sold during the period. For a retailer it may include purchase cost and directly attributable costs; for a manufacturer it reflects the cost of goods completed and sold according to its accounting policy. It is matched with revenue from those sales, so buying inventory and selling inventory are different events.
Read the explanationOperating expenses
Operating expenses are costs of running the business that are not directly included in the cost of goods sold, such as selling, administration, rent, payroll, utilities, and professional services. The category supports analysis of the resources required to operate, but classification should follow the business model and accounting policy rather than a desire to improve gross margin.
Read the explanationCapital expenditure
Capital expenditure, often called capex, is spending to acquire, build, or substantially improve a long-term asset that is expected to benefit the business beyond the current period. It is first recorded as an asset when the recognition criteria are met, then its cost is allocated over use through depreciation or amortisation. Capex is a cash and investment decision; capitalisation does not make it free.
Read the explanationCapitalisation
Capitalisation is the accounting act of recording a qualifying cost as an asset rather than immediately as an expense because it is expected to generate future economic benefit and meets the applicable recognition criteria. It is not a management label for “strategic” spending. The cost must be directly attributable or otherwise qualify under the relevant policy, and it will usually affect profit later through depreciation, amortisation, or impairment.
Read the explanationDepreciation
Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its useful life. It recognises that an asset such as equipment is consumed or used to generate revenue over time; it is not a market-value estimate and usually is not a current cash payment. Depreciation begins when the asset is available for use and follows the chosen method, useful life, residual value, and applicable policy.
Read the explanationAccumulated depreciation
Accumulated depreciation is the total depreciation recognised on a tangible asset since it became available for use. It is a contra-asset balance: it reduces the asset’s gross cost to arrive at carrying amount, while preserving the historical cost for users who need to see the original investment. It is not cash set aside for replacing the asset.
Read the explanationAmortisation
Amortisation is the systematic allocation of the cost of a finite-life intangible asset over the period it is expected to provide benefit. It is the intangible-asset counterpart to depreciation, though the applicable requirements and asset characteristics govern the method. It starts when the asset is available for use and is not a current cash payment.
Read the explanationUseful life
Useful life is the period over which a business expects to use an asset or the number of units it expects to obtain from it. It is an accounting estimate of consumption, not necessarily the physical life, warranty period, or loan term. It drives depreciation or amortisation and should reflect expected use, maintenance, technological change, legal rights, and disposal plans.
Read the explanationResidual value
Residual value is the estimated amount a company expects to obtain from disposing of an asset at the end of its useful life, after estimated disposal costs. It reduces the amount depreciated when supported by evidence. It is not the original purchase price, a hoped-for resale figure, or a way to reduce annual expense without a realistic market basis.
Read the explanationCarrying amount
Carrying amount is the amount at which an asset or liability is recognised in the statement of financial position after relevant adjustments such as depreciation, amortisation, impairment, allowance, or remeasurement. For a tangible asset, it is often cost less accumulated depreciation and impairment. It is an accounting measurement, not automatically the cash proceeds from sale or the amount needed to replace the asset.
Read the explanationImpairment
Impairment is a reduction in the carrying amount of an asset or cash-generating unit when its recorded amount exceeds the amount expected to be recovered through use or sale under the applicable requirements. It tests whether future benefits still support the amount on the balance sheet. Impairment is different from depreciation: depreciation allocates expected use; impairment responds to evidence that value has fallen more sharply or differently than expected.
Read the explanationInventory write-down
An inventory write-down reduces inventory to its net realisable value when expected selling proceeds, after costs to complete and sell, are lower than recorded cost under the applicable requirements. It recognises that stock can remain physically present yet no longer recover its book cost because of obsolescence, damage, expiry, falling prices, or weak demand. It differs from a normal inventory count variance, though both can require investigation.
Read the explanationProvision
A provision is a liability of uncertain timing or amount recognised when a present obligation from a past event exists, an outflow is probable under the applicable requirements, and a reliable estimate can be made. It is not a general reserve for future operating losses, desired investments, or risks the company has not yet created an obligation for. The uncertainty requires evidence and judgment.
Read the explanationContingent liability
A contingent liability is a possible obligation whose existence will be confirmed by uncertain future events outside the company’s full control, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably, under the applicable requirements. It is not recorded as an ordinary liability in those cases, but it may require disclosure so users understand the exposure.
Read the explanationExpected credit losses
Expected credit losses are an allowance for expected shortfalls in collecting contractual cash flows from financial assets such as trade receivables, measured using the applicable requirements and forward-looking information. The allowance recognises credit risk before a specific customer is conclusively in default. It is not a guess based only on last year’s bad-debt percentage, and it does not mean every customer in the allowance will fail to pay.
Read the explanationWrite-off
A write-off removes a receivable or other balance when there is no reasonable expectation of recovery under the company’s policy and the applicable requirements. For a receivable that already has an allowance, the write-off normally uses that allowance rather than creating a new expense at the moment the account is removed. A write-off is a conclusion about a specific balance, not a decision to stop collection activity in every case.
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