I understand the methods of accrual accounting and how to figure out what is “unearned revenue”, “accounts recievable” and the rest of the time of recognition categories on the balance sheet. Apparently I am less clear on what is going into the revenue (sales) category on the income statement. I came across a question that wanted to know what is included in revenue under accrual accounting. Is the figure given for revenue (sales) only giving the value of those goods and services delivered in the period?
If so, why was one of the correct choices for the question “Revenues are recognized when cash is deemed to be collectible”?
I’m confused because why would it matter if cash is collected if revenue is only recognized when the goods or services are delivered? I thought the accounting of the cash income before or after the delivery will take place on the balance sheet (accounts recievable will be reduced, cash will increase or whatever the situation)
…OR I am misinterpreting “when cash is deemed collectible”. They just mean they can’t count the revenue for a service (even if they have already delivered it) if for some reason they dont expect to ever see payment for it. Yea, someone straighten me out, please.
IFRS (IAS) revenue defintion:
IAS 18 defines revenue as ‘the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants’
USGAAP Revenue definition
Revenues are defined by FASB Concepts Statement No. 6 (CON 6) Elements of Financial Statements as inflows or other enhancement of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity ́s ongoing major or central operations.
Under both standards revenue can be recognized and measured under follwing circumstances:
Sales (revenues) of goods and services will be recognized when all the following conditions are met:
a) the entity has transferred to the buyer the significant risks and rewards of ownership of delivered goods (services) b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective further control over goods sold c) the amount of revenue can be measured reliably d) it is probable that the economic benefits associated with the transaction will flow to the entity, and e) the costs incurred or to be incurred in relation to the transaction can be measured reliably. Cheers!
Accrued revenues and expenses and deferred ones arise from the fundamental accounting principle of matching related revenues and expenses (and thus the impact on the operating result) in the same reporting period (often within one fiscal year).
thanks, It appears that accrual principles are the same on the income statement as well as the balance sheet. That was my underlying concern. I grok!
Due to double-entry book keeping principle same action must be taken.
IS
revenue or expense increase/decrease
at the same time in BS
assets/liabilities increase/decrease
result
net changes in equity
this
Revenue is just sales + net accruals