ACG_Ch_4 - Timing Issues u25cf Periodicity Assumption...

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Timing Issues Periodicity Assumption Accounting divides the economic life of a business into artificial time periods Accounting time periods A month A quarter A year The Revenue Recognition Principle Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. The Expense Recognition Principle Let the expenses follow the revenues Should be reported in the same period in which it recognizes the service revenue Accrual versus Cash basis of Accounting Accrual-basis accounting Means that transactions that change a company’s financial statements are recorded in the periods in which the events occur Even if cash was not exchanged Recognize revenues when they perform the services Recognize expenses when incurred Even if cash was not paid Cash-basis accounting Companies record revenue when they receive cash Record an expense when they pay out cash This can often produce misleading financial statements

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