AP Supervisor Flashcards
What do you know about Revenue Recognition?
1- Revenue recognition and matching principal (for expenses) are the base of accrual accounting and are used to determine the accounting period when revenue and expenses are recognized.
2- The Rev Recog. principle says that revenues are recognized in the accounting period in which they are realizable, realized and earned (when the service is rendered or goods are delivered) no matter when cash is received.
(Accrued revenue (or accrued assets) is an asset such as proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a latter accounting period, when its amount is deducted from accrued revenues. (this works like deffered expenses)
For example, a company receives an annual software license fee paid out by a customer upfront on the January 1. However the company’s fiscal year ends on May 31. So, the company using accrual accounting adds only five months worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.)
