Final answer:
Expenses related to the production of a product are recorded as inventory on the balance sheet as assets and include materials, labor, and overhead. They stay there until the product is sold, at which point they are moved to the income statement as the cost of goods sold.
Step-by-step explanation:
In business and accounting, before a product is sold, the expenses related to its production are usually recorded as inventory on the balance sheet. These expenses are considered part of the product's cost and are classified as assets under the category of inventory.
This can include the cost of the raw materials, direct labor used in production, and manufacturing overhead, which encompasses all the indirect costs that are associated with production such as the rent of a factory or machinery costs.
These costs remain in this asset account until the product is sold, at which point they are transferred to the income statement as cost of goods sold (COGS).
Therefore, during the short run of a few months, these production expenses are accumulated and reported as part of inventory. In contrast, over the long term, these costs become part of the expenses that reduce revenue to derive earnings when the products are eventually sold in the market.