Accounting_Clinic_II.pptVIP

Accounting Clinic II Accounting Methods for Measuring Performance Strict cash basis of accounting. Revenues are recorded when cash is received and expenses are recorded when cash is paid. Accrual basis of accounting. Revenues and expenses are recorded on an economic basis independently of the actual flow of cash. Cash Vs. Accrual Basis of Accounting Accrual Accounting: The Question At what point of the operating cycle of the firm should revenues and their related expenses be recognized? Accrual Accounting: Basic Rules Revenue and expense should be recognized at the first point at which both of the following criteria are met: The revenue is earned. The revenue-producing activity has been performed. The revenue is either realized or realizable. That is, the amount of cash to be collected can be estimated with reasonable accuracy. Revenue Recognition For product sale transactions, revenue is typically recognized when when title passes to the customer. For service transactions, revenue is typically recognized when the substantial performance occurred. Because of the intangibility of services, it is often difficult to ascertain when a service consisting of more than a single act has been satisfactorily performed so as to warrant recognition of revenue. Expense recognition According to the matching principle, selecting a revenue-recognition basis also determines whether related costs are expensed immediately or capitalized and expensed subsequently. Generally, expenses and losses are recognized when an entitys economic benefits are used up in the process of generating revenues. We recognize the following classification of costs: Product Vs. Period costs Product costs - Costs directly related to specific revenues of the period (e.g., products sold) are considered expenses of that period, since they arise in the same transaction in which the revenue is recognized. Example are COGS and sales commissions. Period costs - Costs not directly related to particular revenues bu