Original Question: (Do not reply to this one)
Revenue recognition and the matching principle are important concepts in the field of accounting. Discuss with appropriate examples.
Student Discussions:
Reply to each student posts by commenting about their posts and building on the subject (About 100 words each) APA reference.
APA reference. Any sources including, but not limited:
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017).Financial accounting theory and analysis: Text and cases(12th ed.). Hoboken, NJ: Wiley.
1-Laura Huguenel
“Recognition is the formal process of reporting a transaction or event in a company’s financial statements” (Schroeder, Clark, & Cathy, 2017). Revenue recognition is an accounting principle that determines the conditions in which revenue should be accounted for. Revenue is recorded once it is “realizable”, meaning “products or services have been exchanged for cash or claims to cash” (Schroeder et al., 2017). Basically, it is recorded once the cash has been earned. An example is American Airlines because they do not recognize passenger revenue until the flight is completed. This is due to passengers cancelling their flights or the flights themselves being cancelled. “As a result, American initially records its ticket sales as unearned revenue and defers recognizing the revenue from those sales until they are earned” (Schroeder et al., 2017).
In addition to revenue recognition, it is equally important to understand the matching principle. “The matching principle requires that a company tie revenue it generates during a given period -- say a month, quarter or fiscal year -- with expenses it incurred to reap that revenue” (Codjia, 2017). An example of this is when a company purchases major machinery that has a useful life of 10 years. In stead of being fully expensed the year it is purchased the company would depreciate the machinery over its 10-year life. Another example is making a purchase for the company, such as a machine or an appliance, and then reselling it for a profit in the same period. According to the matching principle the company should match both the cost and the revenue made from the sale in that same period.
2-Dayana Alvarez
Recognition is the “formal process of reporting a transaction or event in a company’s financial statements” (Schroeder, Myrtle, & Cathey, 2017). Revenue recognition is a generally accepted accounting principle that determines the specific conditions in which revenue is recognized or accounted for (Kenton, 2019). Normally, revenue is recorded when an event or transaction has occurred, and the amount of revenue is measurable. Companies recognize revenue when the revenue has been realized or realizable which means that a service is provided for a client or customer, or the sale or a product or good has been exchanged for cash or a promise to pay (Schroeder, Myrtle, & Cathey, 2017). Another condition for companies to recognize revenue is that revenue must be earned, and revenue is considered earned when a company has accomplished everything it must do to be entitled to the payment (Schroeder, Myrtle, & Cathey, 2017). For example, a person that provides massage therapy will only be able to recognize revenue when the service has been performed.
In addition to revenue recognition, it is important to understand the concept of the matching principle. The matching principle is one of the basic underlying guidelines in accounting where it directs a company to report an expense on its income statement in the same period in which the related revenues are earned (Accounting Coach, 2019). For example, when a company such as a car dealership needs to pay commission to its sales representatives, the matching principle requires that the amount of commission expense for the month of June be reported on the June income statement along with June’s related revenues (Accounting Coach, 2019).