The test for revenues is when it is earned. Thatgives caused to a discussion as to when a businessactuallyearnsitsrevenueofaRevenueresultgeneratedas1Sabusiness's performance in an economic exchange.That is to say a business enters into a contractualfor a to exchange a performanceagreementconsideration, which will ultimate cumulate in thethatWhenof cash.itcompletesreceiptperformance, it is entitled to receive that cash, ithas earned it as revenue. At that time revenue isrecognized
The test for revenues is when it is earned. That gives caused to a discussion as to when a business actually earns its revenue. Revenue is generated as a result of a business's performance in an economic exchange. That is to say a business enters into a contractual agreement to exchange a performance for a consideration, which will ultimate cumulate in the receipt of cash. When it completes that performance, it is entitled to receive that cash; it has earned it as revenue. At that time revenue is recognized
Thefollowsrecognition of expensesinaTheMatchingConceptsimilarinmanner.allmatchit clearthatmakesaccountingwethethat they helptoagainstrevenueexpensesgenerate.Expenses then follow a similar pattern to thatofrevenue. When expenses are matched in thisare said to have been incurred. Attheymanner,thatthey mustbe recognizedasanmoment.theThisrecognition is independent ofexpense.forCashtheisactualnot criteriapayment.recognition
The recognition of expenses follows in a similar manner. The Matching Concept in accounting makes it clear that we match all expenses against the revenue that they help to generate. Expenses then follow a similar pattern to that of revenue. When expenses are matched in this manner, they are said to have been incurred. At that moment, they must be recognized as an expense. This recognition is independent of the actual payment. Cash is not the criteria for recognition
A case of Accrual-basisAccounting
A case of Accrual-basis Accounting
For example, a companyhad twotransactions during May,1998May 1,paid the two months' rentals inadvancewith $5,000:May30,soldmerchandisesforthepriceof$7.000, at the cost of $4,000,and the buyerwould pay the item at the next month
For example, a company had two transactions during May,1998 May 1,paid the two months’ rentals in advance with $5,000; May 30, sold merchandises for the price of $7,000, at the cost of $4,000,and the buyer would pay the item at the next month
UnderCash-basisRevenue:so:Expenses:$5,000Net income or loss:0- 5,000= -$5.000UnderAccrual-basisRevenue:$7,000Expenses:2,500+ 4,000= $6,250Net income or 1oss:7,000- 6,250= $750
Under Cash-basis: Revenue:$0: Expenses:$5,000 Net income or loss:0- 5,000= -$5,000 Under Accrual-basis: Revenue:$7,000 Expenses:2,500+ 4,000= $6,250 Net income or loss:7,000- 6,250= $750