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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Which principle requires that expenses be recorded and reported in the same period as the revenue that it helped generate?

  1. Historical cost
  2. Revenue recognition
  3. Conservatism
  4. Expense recognition

To determine

Introduction: Accounting principles are general concepts and guidelines that companies follow to record their business transactions and events. There are basically four accounting principles which forms the standard for recording economic events in any business. These are historical cost principle, revenue recognition principle, expense recognition principle, conservatism principle.

To select- A principle with which the expenses are recorded and reported in the same time-period as the revenue that it helped to generate.

Explanation

Explanation for correct answer- Expense recognition principle states that all expenses in a business should be recognized and reported in the same time-period as the revenue the business generates. It can be the same time when the cash is paid, or it might predate or follow with the revenue amount realized. This is commonly referred as matching principle.

Explanation for incorrect answer-

Option A-Historical cost principle states that the resources reported in financial statements should be recorded at initial acquisition cost that is the exchange price at the time the resource is acquired. Hence, it is incorrect option.

Option B- Revenue recognition principle states that in any business revenue should be recorded only when it is realized or earned...

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