MGMT 113 Chapter Notes - Chapter 2: Net Income, Income Statement, Financial Statement
Document Summary
Recognition - formally reporting an economic item or event in the financial statements. Realization - collecting money, generally from the sale of products or services. Cash basis accounting - recognize (report) revenues and expenses in the period in which cash is collected or paid. Accrual accounting - users recognize revenues and expenses in the period in which they occur, regardless of when cash is collected or paid. Expenses are recognized in the period incurred (when the sacrifice is made) regardless of when the cash is paid. Accruals occur when revenue or expenses are recognized before cash changes hands. Accrual accounting is required by generally accepted accounting principles. Expenses that are recognized before cash is paid are called accrued expenses. The term accrual describes a revenue or and expense event that is recognized before cash is exchanged (when the good or service is provided).
