Accounting Concept

Question 1

(a)

Revenue recognition concept

Revenue recognition is an accounting concept whereby revenue is recorded or recognized when the transaction is completed regardless of when the cash is received. Revenue recognition concept is used when preparing accounts because it is important to show the actual revenue that a company earns in current accounting period. For example, a customer ordered 10 yards of fabric, the company will send the bill to the customer. As the bill is sent off, the company will record the transaction as revenue although the company has not actually received the payment yet. This is called accrued revenue. When a telecommunication company sells prepaid talk time through scratch cards, revenue is recognized when the scratch card is sold, but the consumers have not using the services. This is called deferred revenue because the telecommunication company has to give services for the users but the users have to prepay for it.

Matching concept

All businesses have input and output of goods and services. This concept relates these inputs and outputs to one another. It states that expenses have to be matched with revenues in the period in which efforts are made to generate revenues. It is true that a company could have more expenses than its revenue or income, and end up with a loss at the end of the accounting period. If the matching concept is not used when preparing accounts, the financial figures could be misdirecting and lead to a false conclusion. Wages to employees are reported as an expense when the employees worked and not in the time when the employees are paid. If company only paid half of the wages to employees, the other half wages not paid should be recorded also as accrued expenses for the current year. In many times, insurance period may not be the same with accounting period of the company. When the insurance is paid for one year but actually it is only effective for half years, the other half would be the prepaid...