Final answer:
In accounting, expenses are recorded in the period when related revenues are recorded as per the expense recognition principle. Explicit costs are direct out-of-pocket payments, while implicit costs represent non-recorded opportunity costs. The cost and revenue relationship is critical for accurate financial reporting and profitability assessment.
Step-by-step explanation:
The question relates to the expense recognition principle in accounting, which is covered under the subject of Business. According to the expense recognition principle (also known as the matching principle), expenses should be recorded in the period when the related revenues are recorded. This method of expense recognition is employed to achieve a correlation between income and expenses, which is necessary for an accurate reflection of a company’s profitability during a specific time period.
Difference between Explicit Costs and Implicit Costs
Explicit costs are direct out-of-pocket expenditures, such as wages or rental payments, that are readily identifiable and recorded in the financial statements. Alternatively, implicit costs are indirect, non-recorded opportunity costs that come from using assets or resources for a particular purpose rather than their best alternative use.
Understanding the Relationship between Cost and Revenue
Understanding the relationship between cost and revenue is crucial for businesses to determine their profitability. Expenses (or costs) should be matched with the revenues they help to generate, which means recognizing expenses when the revenue is earned, rather than when the cash is paid or the related assets are recorded. This matching of expenses with revenues ensures that financial statements accurately reflect a company’s financial performance.