![]() If an expense is recognized too early, the company’s net income will be understated. If expenses are recorded as they are incurred, they may not match the revenues that they relate to. Matching PrincipleĪccording to the matching principle, expenses should be recognized in the same period as the related revenues. Expense RecognitionĮxpenses do not have a set checklist like revenue, but instead need to follow the Matching Principle. If the price to be paid depends on a future event, then you must wait until that event occurs and the price can be determined. ![]() This agreement can be oral, written, or implied. For this to happen, there must be an understanding between both parties (buyer and seller) about the nature and terms of an agreed-upon transaction. There must be evidence that a sales transaction has taken place. Ownership of goods has been transferred and accepted by the buyer or the service obligation has been completed and the client has been billed. Delivery is complete or services have been rendered If it is not certain exactly when payment will be made, defer the recognition until you have received the payment. It must be certain that the collection of cash will be made from a sale transaction to recognize revenue. Revenue Recognition Collectability is probable If these criterion cannot be met, the recognition must be deferred until it can be met. There are several criteria that are used to recognize revenue when a sale transaction occurs, and when expenses are recorded. ![]() Today, all companies need to follow these general guidelines. ![]() Before GAAP, companies had (more or less) free reign on how and when revenue and expenses were reported, leading to general confusion when trying to compare balance sheets and income statements between companies. One of the first challenges auditors and regulators faced when developing the Generally Accepted Accounting Principles (GAAP) was trying to standardize how companies account for their revenues and expenses. ![]()
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