Describe the income recognition principles and how they are applied

Answer 1

REVIEW AND APPLICATION OF INCOME RECOGNITION PRINCIPLES

Under accrual accounting, revenue increases income and the related expenses decrease income. Authoritative guidance contains specific criteria for recognizing both revenue and expenses. These criteria in U.S. GAAP and IFRS are broadly similar.

Revenue Recognition

Both U.S. GAAP and IFRS provide conditions that arrangements with customers must meet in order for firms to recognize revenue. Although the specifics of these conditions differ, we can express the two general conceptual criteria for revenue recognition as follows:

1 . The seller must have substantially performed its obligations to the customer (for example, by transferring ownership of goods to the customer).

2 . The seller must have obtained an asset from the customer that it can reliably measure. If the asset is not cash, the seller must be reasonably certain of converting it into cash.

Expense Recognition

In expense recognition, the firm recognizes expenses when it consumes assets. If an event or transaction leads to the recognition of revenue, firms match the consumption of any assets (the expense), in time, with the revenue recognized. For example, the seller recognizes cost of goods sold when it recognizes the related revenue from selling the goods.