Accounting & auditingLesson 3 of 5 in the course Accrual Accounting Process

Revenue and Expense Recognition Under Cash and Accrual Accounting

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Revenue recognition is about deciding when a company records the value of goods or services it has provided. The timing matters because revenue affects a company’s reported performance even when the customer has not yet paid.

Revenue is the value of goods or services a company sells or provides to customers during a period. For example, if a landscaping business performs $1,400 of services in August, it has earned $1,400 of revenue for that work.

All flashcards

How does accrual accounting record a sale on account?
It records revenue when the business provides the goods or services; later customer payment is a separate transaction.
What is an expense?
A cost associated with providing goods or services to customers.
When does cash-basis accounting record a purchase on account?
When the business pays the supplier.
Why may unused gift card value not be company revenue?
Applicable rules may require unused funds to be reported or transferred to the state as unclaimed property.
What role do accountants have in revenue reporting?
They should exercise due care, keep up with applicable rules, and help ensure financial reporting is reliable.

Quiz questions

  1. When are cash sales recorded under both cash-basis and accrual-basis accounting?Answer: When the sale occurs and the customer receives the goods or services and pays.
  2. A business receives payment for a gift card that the customer has not used. What does the payment alone establish?Answer: The business has received cash, but it has not necessarily earned revenue.
  3. Why is an expense not simply the same thing as a payment?Answer: An expense is a cost incurred, while a payment is an exchange of cash.
  4. What may a company need to do with unused gift card funds under applicable rules?Answer: Report or transfer them to the state as unclaimed property.
  5. Who is responsible for a company's financial information, and what role do accountants have?Answer: Management is responsible, while accountants help support reliable reporting.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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