Systematic expensing definition
/What is Systematic Expensing?
Systematic expensing is the charging of an asset to expense over a period of time, using a consistently-applied methodology. This approach is commonly used for depreciation and amortization, where a straight-line, accelerated, or usage-based expensing approach is applied. Systematic expensing is needed in these cases, because there is no evidence of the sale or consumption of an asset that would otherwise trigger a charge to expense.
Example of Systematic Expensing
Norrona Software has invested $300,000 in servers that it needs for its programmers, who can be expected to use the machines for five years as part of their software development activities. The company’s accountant uses straight-line depreciation to engage in the systematic expensing of this server cost, where $60,000 is charged to expense in each of the five years. By the end of the five years, the entire cost of the servers will have been charged to expense.
Fraudulent Use of Systematic Expensing
Systematic expensing can be subject to abuse, if the expensing period is longer than the useful life of an asset. When this happens, the profits of the reporting entity will be somewhat overstated, because the associated depreciation is being spread over a longer period than when the underlying asset is actually being used to generate revenue.