It is the end of another work week, and I can hang my work boots and say a job well done to me. From numerous meetings to working with my team to manage an increase in the influx of customer satisfaction responses, to conducting interviews, and deliberating with different stakeholders, it is evident to me that my week was very eventful. I had my regular one-to-one with my line manager, and you sure know the result of such meetings, if you guessed more work, you are right. With all these, I can confidently say that I have earned my wage for the week and my company now owes me.
According to Accrual Basis Accounting, companies record transactions that change a company’s financial statements in the period in which the events occur. In this case, time is the key driver. For example, it does not matter whether cash has been received or not after a service has been rendered, the company must record that transaction in its books so that expenses and revenues are not underreported or overstated. In the same way, these companies must recognize expenses when incurred rather than when paid. All of these are in alignment with the Generally Acceptable Accounting Principles (GAAP).
“Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting.” – Accounting.com
There are a number of accounting principles, and you can find them at this link.
On the other hand, we have the Cash Basis Accounting. In this method, companies record revenue when they receive cash, and they record an expense when they pay out cash. This means that until there is a receipt of cash for services rendered the company will not record a transaction. This also means that these companies will have to record these transactions later even though the transaction happened a while back. Some small businesses can use this Cash basis method because they often have few receivables and payables. However, this method is not in accordance with the Generally Acceptable Accounting Principles.
Let me state the two principles that are used to determine the amount of revenues and expenses to report in an accounting period.
Revenue Recognition Principle
Principle 1 is the Revenue Recognition Principle. This principle recognizes revenue in the accounting period in which it is earned.
Expense Recognition Principle
Principle 2 is the Expense Recognition Principle. This principle matches expenses with revenues in the period when the company makes efforts to generate those revenues.
We can sum up the expense recognition practice as the Expense Recognition Principle or the Matching Principle.
For me, it means I have earned my salary for the week, and I am certain that the accounting team at my place of work has already recorded my working hours in line with my payment. I suppose that companies that practice paid leave days also follow this principle, the difference, in this case, is that the employees do not work on those days, however, it is already documented that they have worked.
In the same vein, I can say that I have earned my wage(Points) for this blog write-up today, no matter how tiny the score might be in the overall score.