Chapter 4 Accounting
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The Revenue Recognition Principle
States that revenue is earned when services are performed, not necessarily when cash is received.
for example: if a company performs a service but does not get paid immediately they would still have to record that service as revenue earned. They would also credit accounts receivable.
The Expense Recognition Principle
"Let Expenses follow the the Revenues"
Expense Recognition states that expenses should be reported in the same period in which the company recognizes revenue.
The Matching Principle
dictates that expenses be matched with revenues.
Accrual Accounting VS Cash Basis Accounting
In Accrual Acc. - companies recognize revenues even when cash is not received.
In Cash Basis Acc- companies record revenue only when cash is paid. This method is prohibited under the generally accepted accounting principles
Cash Basis Acc. is prohibited because it does not accurately measure the financial performance of a company.
for example if a company performs a service one year but is paid the next year the companies expenses and revenues for both year would not be accurate.
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