How do you recognize Revenue and Expenses in Accounting?

Accounting terms and concepts!

Every Corporate Financial Accounting session we have had comes with some new terms and concepts. And there is still more to come! Now I see why the course facilitator had told us during his first session, to always make a note of any new accounting terms. I have been taking notes of my new terms but at this rate, I am sure that my notes will be the size of a text book at the end of the semester.

I find it interesting though because the concepts, though new, are easy to understand once they are explained. And it is not enough to understand them, especially as we are at the mid semester, we must be able to use them in our sentences. We must be able to speak the accounting language!

This article will focus on one of the new concepts we learned recently. They are Revenue and Expenses recognition. As you may already know, revenue is the income a company earns from sales or services rendered. Expense is the amount that a company incurs in order to perform their business transactions and fulfil their obligations.

My latest learning on revenue and expenses is that there are principles guiding the recognition of revenue and expenses.

Revenue recognition principle: this principle states that a company should recognize revenue in the accounting period that they earned it. The principle pays more focus on service rather than the receipt of payment. This means that it does not matter whether the company receives payment; so long as they performed a service, it should be recognized and recorded.

Expense recognition principle: like the above principle, this principle also states that a company should recognize expenses in the accounting period that they incurred them. It does not matter whether the company has made payment for the expenses they incurred or not; expenses incurred must be recognized and recorded.

I learned from the principles of revenue and expenses recognition that time period is the key driver for both principles. As a business manager, the first thing to do is to identify the time period of the transaction – that is the month, the week, the quarter, or the year. The time period usually comes in a range. For example from September 2021 to August 2022, from January to March 2022. It does not have to be one calendar year.

To recognize revenue or expenses, I can ask the following questions:

During this time period, have I rendered a service?

Have I earned income by rendering a service?

Have I incurred any expenses?

If I am able to say “Yes” to these questions, then I must comply with the principles of revenue and expenses recognition.

I also learned from the expense recognition principle that a company must match the expenses incurred with the revenue earned in the time period that they occurred.

Having learned the two principles, I think that it makes a lot of sense to follow these principles. Cash should not be driver when a company wants to record transactions. If this is so, they might find it difficult to report on their revenue and expenses in the period that they occurred. It is better to focus time period rather than the cash payments. If the cash payment comes along during the time period, that is fine but if not, the principles say to record the transaction still.

Accounting is indeed interesting. Do you think so too?

MMBA 3