The Revenue Recognition Principle Of Enron

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The revenue recognition principle requires that revenues be shown in the period in which they are earned, not when cash is collected. If payment is received in advance, it should be recorded as a liability, not as revenue. If this principle is not followed, users of financial statements may be led to believe that a corporation is doing better than it actually is. Looking at Enron, accounting for future costs under the entire contract as expenses was violating the revenue recognition principle since the recognized revenues had not been earned. Yes, the Sithe energies case shows that Enron did not follow the revenue recognition principle. Sithe was one of the first contracts in which Enron employed MTM accounting. The contract was intended to last for 20 years, with an estimated value of $3.4-$4 billion. Through the use of MTM, Enron booked profits before Sithes’ plant even began running. Instead of following the revenue recognition principle and matching the actual costs of supplying the gas and the actual revenue generated from those costs for each period, Enron recorded the present value of their expected future cash inflows as revenue in the current period. Likewise, they recorded the present value of all future expenses as an expense in the current period. Although Enron made adjustments each period for changes in value, not following the revenue recognition principle resulted in Enron producing misleading financial statements. No, I do not think Enron established an
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