The association of costs and expenses with income is one of the basic postulates established in the NIF A-2.
This postulate establishes that costs and expenses must be recognized in the same period in which the income to which they are associated is recognized.
Example of the application of the NIF
Suppose you have a company that manufactures and sells furniture:
- Furniture Sale:
- You sell a piece of furniture for $10,000 on September 1, 2024.
- You recognize revenue of $10,000 in September 2024.
- Related Costs:
- The cost of manufacturing the furniture was $6,000 (materials, labor, etc.).
- In accordance with the postulate of associating costs and expenses with income, this cost must be recognized in the same period (September 2024) to adequately reflect the gross profit of the operation.
In September 2024, you will recognize 1TP4Q10,000 of revenue and 1TP4Q6,000 of costs, giving you gross profit of 1TP4Q4,000.
The association postulate seeks to ensure that the financial statements adequately reflect the relationship between income and the costs/expenses that contribute to generating them, which is essential for a correct financial interpretation.
Below we present the journal policies and an income statement to better exemplify the operations mentioned above:
Accounting Entries:
- Revenue Recognition:
- Post: Clients $10,000
- Pass: Sales revenue $10,000
- Cost Recognition:
- Post: Cost of sales $6,000
- Pass: Inventories $6,000
Income Statement (For the month of September 2024):
| Concept | Amount |
| Sales revenue | $10,000 |
| Less: Cost of sales | ($6,000) |
| Gross Profit | $4,000 |
| Less: Operating expenses | $0 |
| Operating Profit | $4,000 |
| Less: Financial expenses | $0 |
| Profit before tax | $4,000 |
| Less: Taxes | $0 |
| Net Income | $4,000 |
Conclusion:
This postulate is essential to maintaining integrity and consistency in financial information, allowing users of financial statements, such as investors and managers, to make informed decisions based on data that reflect the true relationship between revenues and associated costs. Without this correspondence, financial statements could give a distorted image of the company's performance, which could lead to wrong decisions.
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