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Chapter 2: Question 19Q (page 61)

Explain the revenue recognition principle.

Short Answer

Expert verified

The revenue recognition principle under generally accepted accounting principles provides guidance that a firm should recognize revenue when it is realized or realizable and when it is earned.

Step by step solution

01

Definition of Revenue Recognition Principle

The revenue recognition principle as developed by Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) indicates that the companies recognize revenue in the accounting period when the performance obligation is satisfied.

02

Explanation of Revenue Recognition Principle

The revenue recognition principle under current generally accepted accounting principles provides that companies should recognize revenue when it is realized or realizable and when it is earned. Therefore, proper revenue recognition revolves around three terms:

  • Revenues are realized when goods and services are exchanged by the company for cash or receivables.
  • Revenues are realizable when assets received in exchange by the company are readily convertible to cash or receivables.

Revenues are earned when a company has gradually achieved what it must do to receive the benefits represented by the revenues- means when the earning process is complete or is about to be completed.

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Most popular questions from this chapter

Do the IASB and FASB conceptual frameworks differ in terms of the role of financial reporting? Explain.

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the “measuring stick” used to report on financial performance.

BE2-9 (L05) If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in thefinancial statements for the following items.

(a) Land. (d) Inventory.

(b) Unamortized bond premium. (e) Prepaid insurance.(c) Depreciation expense on equipment.

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a) Legal fees paid in connection with the purchase of land are \(1,500.

b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.

c) A meat market purchases a meat-grinding machine at a cost of \(3,500.

d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.

e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.

f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

Question: Describe the major constraint inherent in the presentation of accounting information.
See all solutions

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