Working with Financial Statements

Working With Financial Statements

Working With Financial Statements

The revenue and expense principles outline financial recording practices that reflect accurate accounts of assets and expenses. These practices ensure proper journal entries and represent an important aspect of general accounting. Journal entries, created according to the revenue and expense principals, remain unchanged until the end of each closing period. Journal entry adjustments regulate account balances and only occur under specific conditions. Successful business practices begin by learning and understanding these basic principles.

The revenue recognition principal requires acknowledging revenue during the period earned. Revenue recognition typically occurs when a transaction is complete. Nevertheless, some revenue requires recording even before full payment is received. This practice satisfies the need for periodic measurements. The practice also requires reasonable guarantee of compensation. For investment purposes, stakeholders require periodic recording of earned revenue regardless of outstanding balances (“Accounting explained”, 2012). For example, consumers sometimes pay for products and services through long term payment programs. The revenue will reflect sales for that period, regardless of outstanding balances, providing investors with the information they need. When evaluating multiple periods, the average sales become more accurate. The revenue recognition principle works in conjunction with expense recognition.

The expense recognition principal requires acknowledging expenses associated with revenue during the same period. Expense recognition occurs after identifying incurred expenses associated with earnings (Internal Revenue Service, 2012). Income statements match expenses incurred to the revenue generated during one period. Expense recognition identifies resources required to produce revenue. Revenue and expense recognition work together as a unit to measure an...