Income Statement

Trident University

Income Statement

TAWANNA J. RICHARD

ACC 201

MODULE 3

Dr. Mayberry

Why is the timing of revenue recognition so important? An income statement should report the results of operations only for the time period specified in the report. That is, a one-year income statement should report the company's accomplishments and sacrifices revenues and expenses only for that one-year period. Revenue recognition criteria help ensure that a proper cutoff is made each period and that no more than one year's activity is reported in the annual income statement. Revenues reflect positive inflows from activities that eventually generate cash flows.

By comparing these activity levels period to period, a user can better assess future activities and thus future cash flows.  The objective, then, is to recognize revenue in the period or periods that the revenue-generating activities of the company are performed. But we also must consider that recognizing revenue presumes that an asset usually cash has been received or will be received in exchange for the goods or services sold. Judgment as to the collectability of the cash from the sale of a product or service will, therefore, affect the timing of revenue recognition. These two concepts of performance and collectability are captured by the general guidelines for revenue recognition in the realization principle.

The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned usually when goods are transferred or services rendered, no matter when cash is received. In cash accounting in contrast revenues are recognized when cash is received no matter when goods or services are sold. Cash can be received in an earlier or later period than obligations are met when goods or...