<p>It appears that you mix up the timing of invoicing with the timing of accrual of an expense or a revenue. There exist special Balance Sheet accounts that do not affect the P&amp;L (with names like "Next-period Expenses" in the Assets side or "Next-period Revenues" in the Libailites/Equity side, depending on the country of course) which you use in order to account for such transactions, where invoicing does not track step-by-step the creation of costs and revenues. Small companies use these usually only when they "trespass" the fiscal-year time-boundary. Big companies may use them month-per-month.
In your specific example, <em>assume</em> that even by accounting standards, you are not entitled to recognize revenue in the current year, because, say, there are clauses in your contract that affect the economic substance of the deal. Still, your subcontractor invoices you now. You will credit the subcontractor account, and you will debit, not expenses, but "Next-period Expenses", and it will be a component of your Assets in the coming Balance Sheet. </p>

<p>Next year, when you will invoice your customer, you will credit this account and you will debit the relevant expense account, thus recognizing in the P&amp;L the expense in the same period that you have recognized the revenue. </p>

<p>Assume that the subcontractor offers software development services and that your Accounting system has the Expense account "Third Party software Development services". Then in the ledger will see this year</p>

<p>\begin{array} { r  r  r |}
  \hline 
\hline                       
  \text {Account Description} &amp; \text {Debit} &amp;  \text{Credit}\\
  \hline                      
\text{Next-period Expenses} &amp; 50 &amp;  \\
\text{Accounts Payble} &amp;  &amp;  50\\
\hline
\end{array}</p>

<p>If you also pay the subcontractor then you get</p>

<p>\begin{array} { r  r  r |}
  \hline 
\hline                       
  \text {Account Description} &amp; \text {Debit} &amp;  \text{Credit}\\
  \hline                      
\text{Accounts Payble} &amp; 50 &amp;  \\
\text{Cash Deposits} &amp;  &amp;  50\\
\hline
\end{array}</p>

<p>Next year, when you invoice the final customer we have, to recognize the expense</p>

<p>\begin{array} { r  r  r |}
  \hline 
\hline                       
  \text {Account Description} &amp; \text {Debit} &amp;  \text{Credit}\\
  \hline                      
\text{Third Party software Development services} &amp; 50 &amp;  \\
\text{Next-period Expenses} &amp;  &amp;  50\\
\hline
\end{array}</p>

<p>which makes the balance of "Next-period Expenses" zero,</p>

<p>and the revenue of course</p>

<p>\begin{array} { r  r  r |}
  \hline 
\hline                       
  \text {Account Description} &amp; \text {Debit} &amp;  \text{Credit}\\
  \hline                      
\text{Accounts Receivable} &amp; 80 &amp;  \\
\text{Services sold} &amp;  &amp;  80\\
\hline
\end{array}</p>

<p>There are more complicated situations of course, for example, when you are entitled to recognize part of the revenue now, even though you have not invoice your customer, but I  leave them as a practice opportunity for you.</p>

CC BY-SA 3.0
2016-05-11T18:21:39.540Z
Alecos, can you please clarify when you say "the subcontractor account" and "the relevant expense account" exactly which accounts (and what types) you are talking about? Please see my Q1, that this is exactly what is confusing me: Do I need to have two accounts: "Assets > Subcontractor" and "Expenses > Subcontractor"? What are the exact accounts to be used here?
SRobertJames
CC BY-SA 3.0
2016-05-11T18:24:59.447Z
@SRobertJames I have already wrote that the account to be debited in such case is a special account named "Next-period Expenses" or alike (and it is part of the Assets group of accounts), while the subcontractor account is the usual one that is aggregated in the Accounts Payable in the Liabilities group.
Alecos Papadopoulos
CC BY-SA 3.0
2016-05-11T18:27:16.580Z
@SRobertJames The "relevant expense account" to be eventually debited next-year, is the ordinary expense account used for the type of expense incurred due to the services of the subcontractor -there is nothing special about it.
Alecos Papadopoulos
CC BY-SA 3.0
2016-05-11T18:58:16.180Z
Thank you, this is helpful, but I feel still leaves my question unanswered.  If, at the time of the subcontractor's completion, only "next period expenses" is recorded, then,in 2017, how do we know to debit "3rd party..." and not, let's say, some other expense category? Where is the record showing that the "next period expenses" consists of this type of expense and not another one?
SRobertJames
CC BY-SA 3.0
2016-05-11T18:59:33.500Z
@SRobertJames "Next-period Expenses" can be decomposed into sub-accounts.
Alecos Papadopoulos
CC BY-SA 3.0
2016-05-11T18:08:18.070Z
2016-05-11T18:38:34.120Z
2016-05-11T18:38:34.120Z
Alecos Papadopoulos
<p>It would seem to me the best way to handle this is to have a Cost Ledger, distinct from the General Ledger.  (The Cost Ledger is not part of the accounting equation or financial statements; but rather a distinct record.) The Chart of Accounts for the Cost Ledger is identical to that of the Expenses in the General Ledger.  Every cost gets an entry in the Cost Ledger, and can either be expensed, in which case it is immediately replicated in the GL as an expense, or capitalized, in which case it is immediately replicated in the GL as an asset (not necessarily of the same account: there is only need for a few asset accounts).</p>

<p>If it is capitalized, the Cost Ledger will show how it should be expensed: either based on time, or based on a particular sale.</p>

<p>To use Alecos' example:</p>

<ol>
<li>Cost Ledger gets "Third Party software Development services" of 50, to be expensed when project 0589 is completed</li>
<li>GL gets "WIP Assets" entry of 50</li>
<li>When 0589 is completed, then WIP is credited by 50, Third Party software Development services" debited by 50, A/R debited by 80, Revenue credited by 80</li>
</ol>

<p>Is there any downside to that?<br>
Is this practice used?<br>
Can it be done via standard ERP or accounting software?</p>

CC BY-SA 3.0
2016-05-12T01:21:40.520Z
2016-05-12T01:21:40.520Z
SRobertJames
<p>I understand that the accounting matching principle requires incurring the expense in the same period as the revenue.  But I'm confused how one would go about doing this in double entry accounting.</p>

<p>For example, imagine in 2016 I pay a subcontractor \$50,000; and, in 2017, I finish the work and issue an invoice for \$80,000.  Now, since I didn't invoice for the work in 2016, I can't show the 50k as an <em>expense</em>, but rather an asset; only in 2017 do I move it from an asset to an expense.</p>

<ol>
<li>Does that mean that every expense in the chart of accounts needs to have a matching asset category? For example, if I have an expense "Subcontractor", I need to have an asset "Accrued Subcontractor"? None of the chart of accounts I've seen have such a repetition, and it seems unwieldy and error prone.</li>
</ol>

<p>And, if I don't have the same level of detail in my Assets as the Expenses, then, when it becomes time to move them from Assets to Expenses, where will I get that information?</p>

<ol start="2">
<li>If I invoice based on cost-plus-fee, won't I have a chicken and egg problem? When I look at the cost of a project, there won't be expenses until I invoice? So how will the costs show up?</li>
</ol>

<p>A great example would be to give the general ledger entries for my exact scenario.</p>

CC BY-SA 3.0
2016-05-11T17:37:11.793Z
I'm voting to close this question as off-topic because this question is about accounting, not economics.
Fix.B.
CC BY-SA 3.0
2016-05-11T17:49:48.813Z
Accounting is one of the topics listed in Economics.StackExchange; it even has its own tag.
SRobertJames
CC BY-SA 3.0
2016-05-12T02:09:56.047Z
Do not infer that tags make things on topic, anyone with enough reputation can make a tag. In general, accounting questions are not on topic: see the FAQ at http://meta.economics.stackexchange.com/questions/164/welcome-to-economics-se. Some of us are trying to change that: see meta post http://meta.economics.stackexchange.com/questions/1526/might-accounting-questions-be-on-topic
BKay
<accounting>
How is the matching principle implemented with double entry accounting?
SRobertJames
# How is the matching principle implemented with double entry accounting?

(Asked by: username_0 on 2016-05-11)

I understand that the accounting matching principle requires incurring the expense in the same period as the revenue. But I'm confused how one would go about doing this in double entry accounting.

For example, imagine in 2016 I pay a subcontractor \$50,000; and, in 2017, I finish the work and issue an invoice for \$80,000. Now, since I didn't invoice for the work in 2016, I can't show the 50k as an *expense*, but rather an asset; only in 2017 do I move it from an asset to an expense.

1. Does that mean that every expense in the chart of accounts needs to have a matching asset category? For example, if I have an expense "Subcontractor", I need to have an asset "Accrued Subcontractor"? None of the chart of accounts I've seen have such a repetition, and it seems unwieldy and error prone.

And, if I don't have the same level of detail in my Assets as the Expenses, then, when it becomes time to move them from Assets to Expenses, where will I get that information?

2. If I invoice based on cost-plus-fee, won't I have a chicken and egg problem? When I look at the cost of a project, there won't be expenses until I invoice? So how will the costs show up?

A great example would be to give the general ledger entries for my exact scenario.

**Tags:** accounting

> **Comments:**
> **username_1**: I'm voting to close this question as off-topic because this question is about accounting, not economics.  
> **username_0**: Accounting is one of the topics listed in Economics.StackExchange; it even has its own tag.  
> **username_2**: Do not infer that tags make things on topic, anyone with enough reputation can make a tag. In general, accounting questions are not on topic: see the FAQ at http://meta.economics.stackexchange.com/questions/164/welcome-to-economics-se. Some of us are trying to change that: see meta post http://meta.economics.stackexchange.com/questions/1526/might-accounting-questions-be-on-topic  

---

## 2 answers

### Answer by username_3 on 2016-05-11. Score: 1

It appears that you mix up the timing of invoicing with the timing of accrual of an expense or a revenue. There exist special Balance Sheet accounts that do not affect the P&L (with names like "Next-period Expenses" in the Assets side or "Next-period Revenues" in the Libailites/Equity side, depending on the country of course) which you use in order to account for such transactions, where invoicing does not track step-by-step the creation of costs and revenues. Small companies use these usually only when they "trespass" the fiscal-year time-boundary. Big companies may use them month-per-month.
In your specific example, *assume* that even by accounting standards, you are not entitled to recognize revenue in the current year, because, say, there are clauses in your contract that affect the economic substance of the deal. Still, your subcontractor invoices you now. You will credit the subcontractor account, and you will debit, not expenses, but "Next-period Expenses", and it will be a component of your Assets in the coming Balance Sheet.

Next year, when you will invoice your customer, you will credit this account and you will debit the relevant expense account, thus recognizing in the P&L the expense in the same period that you have recognized the revenue.

Assume that the subcontractor offers software development services and that your Accounting system has the Expense account "Third Party software Development services". Then in the ledger will see this year

\begin{array} { r r r |}
\hline
\hline
\text {Account Description} & \text {Debit} & \text{Credit}\\
\hline
\text{Next-period Expenses} & 50 & \\
\text{Accounts Payble} & & 50\\
\hline
\end{array}

If you also pay the subcontractor then you get

\begin{array} { r r r |}
\hline
\hline
\text {Account Description} & \text {Debit} & \text{Credit}\\
\hline
\text{Accounts Payble} & 50 & \\
\text{Cash Deposits} & & 50\\
\hline
\end{array}

Next year, when you invoice the final customer we have, to recognize the expense

\begin{array} { r r r |}
\hline
\hline
\text {Account Description} & \text {Debit} & \text{Credit}\\
\hline
\text{Third Party software Development services} & 50 & \\
\text{Next-period Expenses} & & 50\\
\hline
\end{array}

which makes the balance of "Next-period Expenses" zero,

and the revenue of course

\begin{array} { r r r |}
\hline
\hline
\text {Account Description} & \text {Debit} & \text{Credit}\\
\hline
\text{Accounts Receivable} & 80 & \\
\text{Services sold} & & 80\\
\hline
\end{array}

There are more complicated situations of course, for example, when you are entitled to recognize part of the revenue now, even though you have not invoice your customer, but I leave them as a practice opportunity for you.

> **Comments:**
> **username_0**: username_3, can you please clarify when you say "the subcontractor account" and "the relevant expense account" exactly which accounts (and what types) you are talking about? Please see my Q1, that this is exactly what is confusing me: Do I need to have two accounts: "Assets > Subcontractor" and "Expenses > Subcontractor"? What are the exact accounts to be used here?  
> **username_3**: @username_0 I have already wrote that the account to be debited in such case is a special account named "Next-period Expenses" or alike (and it is part of the Assets group of accounts), while the subcontractor account is the usual one that is aggregated in the Accounts Payable in the Liabilities group.  
> **username_3**: @username_0 The "relevant expense account" to be eventually debited next-year, is the ordinary expense account used for the type of expense incurred due to the services of the subcontractor -there is nothing special about it.  
> **username_0**: Thank you, this is helpful, but I feel still leaves my question unanswered.  If, at the time of the subcontractor's completion, only "next period expenses" is recorded, then,in 2017, how do we know to debit "3rd party..." and not, let's say, some other expense category? Where is the record showing that the "next period expenses" consists of this type of expense and not another one?  
> **username_3**: @username_0 "Next-period Expenses" can be decomposed into sub-accounts.  

---

### Answer by username_0 on 2016-05-12. Score: 0

It would seem to me the best way to handle this is to have a Cost Ledger, distinct from the General Ledger. (The Cost Ledger is not part of the accounting equation or financial statements; but rather a distinct record.) The Chart of Accounts for the Cost Ledger is identical to that of the Expenses in the General Ledger. Every cost gets an entry in the Cost Ledger, and can either be expensed, in which case it is immediately replicated in the GL as an expense, or capitalized, in which case it is immediately replicated in the GL as an asset (not necessarily of the same account: there is only need for a few asset accounts).

If it is capitalized, the Cost Ledger will show how it should be expensed: either based on time, or based on a particular sale.

To use username_3' example:

1. Cost Ledger gets "Third Party software Development services" of 50, to be expensed when project 0589 is completed
2. GL gets "WIP Assets" entry of 50
3. When 0589 is completed, then WIP is credited by 50, Third Party software Development services" debited by 50, A/R debited by 80, Revenue credited by 80

Is there any downside to that?  
Is this practice used?  
Can it be done via standard ERP or accounting software?


---

