Question

Write a one page summary about the following title:The cost of assets consumed or services used in the process of earning revenue

Answer 1

Cost of assets means expenses which are shifted from Balance Sheet to Profit and Loss statement.

Expenses mean cost of assets consumed or services used in process of earning revenue.

Revenue means income earned. Revenue and expenses together determine whether their is profit or loss.

When revenue is greater than expenses it is profit and when expenses are greater then revenue it is considered as a loss.

Cost of assets consumed.means assets which have been used or services which have been availed in order to meet the day to day needs. The associated utility of good or services has been consumed and hence it is reclassified from Balance Sheet to Profit and Loss as expense.

When any asset the utility of which has not been consumed it is shown in Balance Sheet.

Example - Inventory, prepaid expenses, etc

However, when inventory is sold or prepaid expense the utility of which is consumed the same is shifted from Balance Sheet. This means that these are no longer assets as their benefit has been consumed. Hence, it becomes a cost now. These consumed cost is required for earning revenue.

Any business incurs expenditure. This expenditure is done in current period which may relate to current or prospective period. Such prospective period cost is asset. Current period cost is consumed cost.

Hence, the statement, cost of assets consumed or services used are consumed cost in process of earning revenue.

These costs may be inventory cost which are shown under inventory in Balance Sheet but once sold are classified as Cost of goods sold under Profit and Loss account.

It includes many expenses. These expense if paid in advance are of prepaid nature and shown under Balance Sheet as Current Assets. But classified as expenditure once services are consumed.