Accrual: Generally Accepted Accounting Principles and Revenue

Revenue income is income generated by sales of goods or service done by a business for instance sale of goods to customers, rent received from debtors, commission received etc. Revenue income is money that comes into the business from performing its day by day

Revenues are the monies that are brought in as a result of the business’ core functions in their respective industry. Revenues are different from gains in that revenues can be accounted for, while still taking a loss in the overall profitability. If an item were to be sold below cost, it brings revenue (selling price), but was sold at a loss.

The accrual basis of accounting uses the adjusting process to recognize revenues when earned and expenses when incurred. The cash basis of accounting recognizes revenues when cash is received and records expenses when cash is paid. An example of accrual basis of accounting is if a company is insuring a building. The insurance company bills the company $600 every six months. If each bill is for six months of coverage, then under the accrual method, the company would not record a $600 expense in January and a $600 expense in July. It would instead record a $100 expense each month for the whole year.

Reports revenues and expenses for a specific period of time. A firm's revenues, gains, expenses and losses are listed on the income statement. Revenue is money earned from a company’s

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

This income statement tells how much money a company has brought in (its revenues) how much it has spent (its expenses) and the difference between the two (its profit). The income statement show’s a company’s revenues and expenses over a specific time frame. This statement

“An income statement measures the performance over some period of time, usually a quarter or a year”, states the authors of Essentials of Corporate Finance. (Ross, Westerfield, Bradford 2014, p. 27). There are three aspects of an income statement that a financial manager needs to keep in mind when analyzing the numbers; GAAP, cash versus noncash item, and time and costs. GAAP will show revenue when it accrues. According to the authors of Essentials of Corporate Finance, “The general rule is to recognize revenue when the earnings process is virtually complete and the value of an exchanges of goods or services is known or can be reliably determined” (Ross, Westerfield, Bradford 2014 p. 28). As some production costs of items produced are made on credit, the revenue on that item will not be recognized until the sale of that item occurs; any other costs incurred in assembling that product will also not be recognized until the time of its sale (Ross, Westerfield, Bradford 2014 p.28- 29). With this situation occurring, the income statement might not be able to represent all the

Accruals. This occurs when sales and expenses are recorded when they incur, not when they are paid out or the payment is received. In other words, the record should be made immediately no matter if the payment was received or not, paid out or not yet. Accruals can be called unpaid bills, sales on credit and other expenses over due.

Under GAAP, it is possible to use cash-basis or accrual basis accounting for revenue recognition. Under cash basis, revenue is recognized with payment is received. Under accrual basis, revenue is recognized when it becomes economically significant. GAAP has specific requirements for various industries on when an event qualifies to be recognized as revenue.

Accrual accounting is a system of accounting that is based on the accrual principal accounting. This principal requires revenue to be recognized and recorded when earned. Expenses are to be recorded when they occur. The accrual basis of accounting is used by most companies. Very small businesses and individuals use cash basis accounting.

Net income is total revenues minus total expenses incurred to generate those revenues all within the same reporting period. Net income is calculated by the accrual accounting methodology meaning that the expenses incurred to generate revenues are reported at the same time the related revenues are reported. Both revenue recognition and expenses paid may not coincide with actual cash transactions. Net cash from operating activities, on the other hand, is not determined by accrual but by

Accrual accounting shows outcome of transactions and other events such as assets and liabilities of entity 's in such a periods in which effects occur even if cash is paid or received in a different time.

Revenue from the provision of goods and all services is only recognized when the amounts to be recognized are fixed or determinable, and collectability is reasonably assured (Elliot B., Elliot J., 2007)

Accrual accounting is an accounting method that is utilized to size the performance and of a company by recognizing circumstances regardless of when cash transactions occur. They are documented by matching revenues to expenses at the time in which the transaction occurs rather than when a payment is processed. This method allows the current cash credits and debits to be combined with future expected cash flows to give a more accurate picture of a company 's current financial state. It is ideal to use this method of accounting if an organization has a revenue of more than five million per year. While the accrual method shows the flow of business income and debts more accurately, the downside to this method of accounting is that financial advisers may be blindsided as to what cash reserves are available, which could ultimately result in some serious cash flow obstacles. A common example that I have seen used which helps me understand is when your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven 't paid you yet. Cash Basis accounting is when revenues are documented when cash is received and expenses are recognized when paid. The cash basis of accounting is usually utilized by small companies with a revenue of less than one million annually. The cash method provides a more accurate picture of how much actual cash your business has. Cash basis accounting is allowed for tax purposes only for smaller

This principle states that revenue must be reported on accrual basis of accounting; i.e. recognize revenue when it is earned regardless of whether cash has been received or not. If a company is selling goods, it must recognize sales in the accounting period when the benefits and risks associated with ownership of goods are transferred to buyer. If it is credit sales, revenue will be accounted for along with subsequent debtor, whereas in case when offering a service, company will recognize revenue on basis of stage of completion of services as per the contract.