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Hi Sir, can you please explain the accruals concept (matching concept) as
per below 3 theory :theory 1 :
The accruals concept requires that when inventories are sold,the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized.I don’t understand why the carrying amount should recognized as expense?
Inventories carrying amount should be assets right ?theory 2 :
The amount of any written-down of inventories to net realizable value and all losses of inventories shall be recognized as an expense in the period the write-down or loss occurs.theory3 :
the amount of any reversal of any write-down of inventories, arising from an increase in net realizable value,shall be recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.thank you
These are not theories – they are rules 🙂
1. The expense is recorded when the goods are sold (not when they are bought). Until they are sold they are current assets.
2. We value inventory at the lower of cost and net realisable value. If you are reducing them to NRV then the expense of doing it is recorded immediately (even though the goods have not yet been sold).
3. This is really not relevant for F3, but if you later find out the NRV is higher and therefore increase the value of the inventory (but never above cost of course) then you do it in the period they are sold.
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