Business Administration 2257 Chapter Notes - Chapter 4: Deferral, Cash Cash, Debits And Credits
Document Summary
Accounting divides the economic life of a business into artificial time periods. Accounting time periods are one month, one quarter (3 months), or one year. Revenue is recognized when there is an increase in an asset or a decrease in a liability. Revenue recognition occurs when the sales or performance effort is substantially complete, the amount is determinable (measurable), and collection is reasonably assured. In a merchandise company, revenue is considered to be earned when the merchandise is sold. In a service company, revenue is considered earned at the time the service is performed. Expenses are recognized when there is a decrease in an asset or increase in a liability and this change can be measured reliably. Expense recognition changes in assets and liabilities. Accrual basis accounting transactions affecting a company"s financial statements are recorded in the periods in which the events occur, rather than when the company actually receives of pays the cash.