Revenue Recognition Principle: revenue is recorded in the period when the goods or service were provided to the customer. Such as, if the services or goods were provided in the 2019 calendar year, then the revenues are recorded in the 2019 income statement. Remember that revenue is not earned until the goods or service is provided to the customer.
Remember that Differed Revenue is listed as a Liability against the company because it has not been performed to the customer.
Matching Principle: expenses are reported in the same period as the revenues they helped to generate, because of the causal relationship between the expense and the revenue.
Don’t fixate on proving the Matching Principle because some expenses do not have immediate links to revenue creation, it is just assumed that these expenses will generate revenue, such as employee costs, advertising or even supplies. These kind of expenses are often referred to as Period Cost.
Accrual-Basis verses Cash-Basis Accounting:
In Accrual -Basis – revenues and expenses are recorded in the period that they are provided.
In Cash-Basis – revenues and expenses are recorded when CASH is either received or expensed.
Review Illustration 3-1 and 3-2 (pages 110-111)
Cash-Basis accounting is more simple in its accounting, but NOT ACCEPTED UNDER GAAP
Most companies will use Accrual-Basis Accounting – but at the end of the year, they will have to make adjustments to their accounting records to accurately reflect the parity between revenues and expenses.
