Revenue & Expense Recognition

Revenue & Expense Recognition:

Accrual Accounting - revenues are recognized when earned and expenses when incurred (not received or paid)

Revenues or Gains are recognized when:

• Earned - goods are delivered
• Realizable - collect or claim to cash

Revenue Recognition:

• Binding arrangement exists (contract)
• Services rendered/ delivered
• Fixed or determinable price exists
• Collection is reasonably assured

Sales = buyer has a right of return (reasonably estimable or with expiration date)

Recognize Expenses or Losses as Incurred:

• Economic benefit is used up/ consumed or assets lose future benefit (incurred)
• Cause & Effect - expenses that produce revenue at identifiable points in time to match directly to revenue
• Systematic & Rational Allocation - produce revenue over long periods (reasonable allocation, e.g. dep)
• Immediate Recognition - expenses can't be directly related to specific benefits (e.g. salaries - SG&A exp)

Risks & Uncertainties:

4 areas of disclosure:

1. Nature of operations - how entity generate revenue
2. Use of estimates - GAAP or other frameworks
3. Certain significant estimates - reasonably possible change in estimate
4. Current vulnerability associated with certain concentrations - entity does not diversify, possible future events

FASB Accounting Std Codification: Stmts on Fin Accounting Concepts (SFAC)

Emerging Issues Task Force (EITF) - account for new & unusual financial transactions

Summary of significant accounting policies (notes in F/S).

Summary of significant assumptions - for prospective F/S

Other notes to F/S