Revenue Recognition Principle

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“Recognition principle first of all what is a revenue. A revenue is the increasing resources resources from the provision of goods and services for example receiving payment for providing a such as a cake or receiving payment for providing a service such as mowing. The lawn. So what is the revenue recognition principle revenue is recorded when earned not won cash is received let s look at some examples assuming the accounting period ends each month example 1 on the first of january.

A person goes to your bakery and orders a cake for next month..

And if i give you cash for it on the 1st of february. They come and collect this cake that they have already paid for so on the 1st of january. The cash was received. But it was not until the 1st of february that the cake was actually provided so one should the revenue be recorded the revenue should be recorded in the month of february.

Because you did not actually earn the money until you gave your customer his cake this is known as a deferred revenue a deferred revenue is when cash is received before revenue is earned let s look at another example example..

2 on the 1st of march your friend asks you to look after his car and also wash it for him telling you who will pay you later. It is not until the 1st of april that your friend comes to collect his car and pay you for your services. So it was drawing much that you provided the service. The carwash.

But it was not until april that you received the money for it so once should the revenue be recorded march he earns the revenue when you washed the car even though it wasn t until later that you received it this means that the receipt of cash is not required to record of revenue..

This is known as an accrued revenue. An accrued revenue is when cash is received after revenue is earned or in other words revenue is earned before cash is received so when is the revenue recognition principle applied in accounting. It is used when producing the statement of comprehensive income which is a financial statement that records the revenues and expenses of the accounting period to find the company s profit or loss. It is also used for entries.

Which is accrual based accrual accounting can be summed up as revenue is recorded when earned and expenses are recorded..

When incurred. Which is basically the revenue recognition principle into the matching principle the matching principle is like the revenue recognition principle. But for expenses in summary revenue is recognized when it is earned whether cash is paid in advanced deferred revenue or cash is paid afterwards accrued revenue. Thank you for watching ” .


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