As part of accrual basis accounting, revenues and expenses are recognized by the following principles:

1)Revenue recognition: Revenue is recognized when both of the following conditions are met:

2)Revenue is earned.

3)Revenue is realized or realizable.

• Expense recognition: Expense is recognized in the period in which related revenue is recognized. This is also known as the matching principle.

 

Respond to the following

• Identify and describe when the revenue recognition principle requirements are usually met. Provide an example.
• Identify and describe when the expense recognition principle requirements are usually met. Provide an example.

1) As per revenue Principle Revenue is recognized when Sales or services are provided or performed for that period , Which means Revenue is earned and disclosed in Profit and loss account when we perform that service or sale whether that customer has provided the payment ,The payment can be accrued but Service or Sale for that period to be completed .For example

1. A customer Provided us $ 10000 for sale made to him which means we have earned the revenue and recognized it as sale is completed.
2. A customer provided us $10000 advance on 30 DEC 2019 But services will be completed in JAN 2020, So now we will recognized this sale in year 2020 not in year 2019 and in year 2019 we will pass the entry in books Cash Dr $10000 , Unearned revenue CR $10000

And in 2020 we will pass entry by recognizing this sale

Unearned revenue Dr 10000

Sales revenue Cr 10000

3) Sales made to customer in year 2019 and delivery is also completed in year 2019 but payment received in year 2020 so in this case sales will be recognized in year 2019 only And we will pass the entry Account receivable Dr $10000 , Sales revenue Cr $10000

and in 2020 we only pass the entry of payment receiving

part 2 ) As per the expense recognition principle requirements are usually met when we spend the expenses for the period we earned the revenue For example

1. Rent paid for the year 2020 in 2019 of $2000 , So in books we will pass the entry Prepaid rent Dr $2000 , Cash Cr $2000 and in year 2020 we will recognized the expense Rent expense Dr 2000 , Prepaid rent Cr 20000
2. Salary and wages payable for the year 2019 in year 2020 , So employees has worked for year 2019 so will recognize this expense in year 2019 only by passing the entry

Salary and wages Expense Dr $2000

salary and wages payable Cr $2000

This way we will recognize the expense in year 2019