MEMO To: Financial Accounting Students From: Non Accounting Professional (COO, C
ID: 2539016 • Letter: M
Question
MEMO To: Financial Accounting Students From: Non Accounting Professional (COO, CEO) Date: February 20, 2018 Subject: Project #1 Assignment-Two Accounting Principles and Accrual Accounting Please create a memo (in proper memo format) that explains "The Revenue Recognition Principle" and "The Matching Principle". You should use definitions to explain each principle and show examples of where and when each principle is used. (Hint: Use of the accounting equation with dollar amounts that will explain these concepts.) Also, explain accrual accounting and how it interacts with "Revenue Recognition" and "The Matching Principle". You are explaining these concepts to a non accounting professional (i.e.-the CEO or COO) A one page memo will be sufficient. Must be typed or printed from a computer. The proper memo format is shown here. Memo is due March 6, 2018Explanation / Answer
To: Non Accounting Professional (COO, CEO)
From: Financial Accounting Expert
Date: March 5, 2018
Subject: Two Accounting Principles and Accrual Accounting
Revenue recognition principle: The revenue recognition principle states that revenue should be recognized and recorded when it is realized or realizable and when it is earned. In other words, companies shouldn’t wait until revenue is actually collected to record it in their books. Revenue should be recorded when the business has earned the revenue.
Where a company receives cash in advance for which goods or services are to be provided at a future time, it initially debits cash and credits unearned revenue (also known as prepaid revenue). Unearned revenue is a liability that is subsequently converted into earned revenue when the goods or services are provided to customers. It is done by debiting unearned revenue (or prepaid revenue) and crediting revenue.
A situation where company provides goods and services for which the cash is to be received at a future date, the revenue is recorded immediately without waiting for the time when the cash will be collected. It is recorded by debiting accounts receivable and crediting revenue.
Example, Johnson and Waldorf, LLC is an accounting firm that provides tax and consulting work. During December, JW provides $2,000 of consulting work to one of its clients. The client does not pay for the consulting time until the following January. According to the revenue recognition principle, JW should record the revenue in December because the revenue was realized and earned in December even though it was not received until January.
Matching Principle: According to the Matching Principle, the expenses incurred in an accounting period should be matched with the revenues recognized in that period, e.g., if revenue is recognized on all goods sold during a period, the cost of those goods sold should also be charged to that period. It is wrong to recognize revenue on all sales, but charge expenses only on such sales as are collected in cash till that period.
Example, A hospital pays $20,000 per month to 5 of its doctors. Monthly sales are $500,000. $100,000 worth of monthly salaries should be matched with $500,000 of revenue generated.
Accrual Accounting: When transactions are recorded in the books of accounts as they occur even if the payment for that particular product or service has not been received or made, it is known as accrual based accounting.
Revenue Recognition is a key concept in the accrual basis of accounting because revenue can be recorded without actually being received.
The matching concept exists only in accrual accounting. This principle requires that you match revenues with the expenses incurred to earn those revenues, and that you report them both at the same time.
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