Chapter 4 Outline

Accounting: Tools for Business Decision Making

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Chapter 4 I. Revenue Recognition Principle and Matching Principle Determining the amount of revenues and expenses to report in a given accounting period can be difficult. Two principles are used as guidelines: 1. Revenue recognition principle - Revenue is recorded and reported in the period it is earned in (when a service is performed or a sale is complete. 2. Matching principle - The matching principle requires that efforts ( expenses) be matched with accomplishments ( revenues ). The critical issue is determining when the expense makes its contribution to revenue. II. Cash Basis versus Accrual Basis of Accounting With cash basis accounting , revenue is recognized (recorded) when cash is received. Expenses are recognized (recorded) only when cash is paid. Accrual basis accounting requires accountants to adhere to the revenue recognition principle and the matching principle. Cash basis accounting does not satisfy the requirements of Generally Accepted Accounting Principles (GAAP) , whereas accrual basis accounting does. Accrual basis accounting provides an objective measurement of net income. III. The accounting cycle (continued).
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