The first is to directly match revenues and expenses. As you may have guessed already, the matching principle states that we match expenses with revenues. The matching principle (or the matching concept, or just matching) is related to the first foundational principle of accrual basis accounting, and it relates to expense recognition. You may be wondering what happens if the customer never pays. No effect on assets = Deposit (liability) − $1,500 and Revenue (equity) + $1,500Īssets (cash) is not affected because we already collected the cash a while back, and now we are just wiping out a debt (customer deposit) by doing the work (and recognizing the revenue).Īgain, the rule to memorize is this: recognize (record) revenue as it is earned (regardless of when the cash is collected, or even IF it is collected.) Now, when Nick does the work, he can recognize the revenue (which has already been realized): In other words, he owes it to the customer (to do the work or refund the money) so it’s a debt. Nick is in possession of the money, but it is not his. In this case, if the customer pays Nick in advance, but Nick never shows up to do the work, Nick hasn’t earned the money, and it doesn’t belong to him. Even though you paid that money to the rental company, it’s still your money, and if the deal doesn’t happen, you get the money back (if it’s a refundable deposit). You may have paid a deposit on a rental at some point. This is the cornerstone of accrual basis accounting: to recognize revenue as it is earned.īefore we move on to a little bit more advanced and technical explanation of revenue recognition, let’s take a look at what happens if the client pays in advance of the work being done.Ĭash $1,500 (asset) = Deposit (liability) $1,500 + (no effect on equity)Ī customer deposit is often called Unearned Revenue (because it was collected before it was earned) but let’s avoid that title because it’s not revenue until it is earned (until Nick does the work).
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |