Log out Go to App
Go to App

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Instructions

(a) Identify and discuss the benefits that can be expected to be derived from the FASB’s conceptual framework.

(b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important.

(c) Statement of Financial Accounting Concepts No.8 describes a number of key characteristics or qualities for accounting information. Briefly discuss the importance of any three of these qualities for financial reporting purposes.

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.

Question: What are some of the differences in elements in the IASB and FASB conceptual frameworks?

Question: What two assumptions are central to the IASB conceptual framework?

Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.

Instructions

a) Describe briefly the following characteristics of useful accounting information.

1. Relevance (4) Comparability

2. Faithful representation (5) Consistency

3. Understandability

b)For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other.

1. Relevance and faithful representation.

2. Relevance and consistency.

3. Comparability and consistency.

4. Relevance and understandability.

c) What criterion should be used to evaluate trade-offs between information characteristics?

See all solutions

Recommended explanations on Business Studies Textbooks

Intermediate Accounting

Read Explanation

Corporate Finance

Read Explanation

Managers

Read Explanation

Business Operations

Read Explanation

Strategic Analysis

Read Explanation

Change Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free