Accounting 103: Revenue Recognition Principle - Transaction Analysis

Hi,

Thank you very much for watching. This is just one video out of many explaining one of the key accounting principles: Revenue Recognition.

The simple accounting equation - also called the balance sheet equation, describes the relationship between a person's or business' assets, liabilities, and owner's equity. It is the basis for the bookkeeping scheme of double entries. The total debits for each transaction are equal to the total credits. It can be further articulated as:

Assets = Liabilities + Owner's Equity

Financial Statement:

Quarterly and annual accounts of a business are essentially explicitly extracted from the accounting methods utilized in bookkeeping activities. Such calculations, entered in the general ledger of a company, would provide the material which ultimately constitutes the basis of the financial statements of a business. This includes reports on expenses, cash flow, interest and loan payments, salaries, and investments in companies.

Double-entry bookkeeping system:

The accounting method serves a significant function as the foundation for the bookkeeping framework with double entries. The main aim of the double-entry scheme is to maintain track of loans and rewards and to ensure that their amount still meets the company's income, a measurement done by the accounting algorithm. This is based on the premise that every expenditure is having an equivalent effect.

Every transaction is recorded twice so that the debit is balanced by a credit.

Company worth:

As the balance sheet is based on the accounting theory standards, this calculation may also be assumed to be liable for calculating an individual company's net worth. The basic components of the accounting system involve estimating all corporate capital and corporate obligations, thereby allowing shareholders to gauge the cumulative worth of the properties of a business.

Since valuation is held on a statistical basis, though, the wealth is not necessarily the organization's net worth. A business will also depreciate capital assets over 5–7 years, which implies that the investments on the books are seen to be less than their "actual" value, or what they will be worth in the stock market.

Revenue recognition principle:

The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.

Cash can be received in an earlier or later period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

Accrued revenue: Revenue is recognized before cash is received.
Deferred revenue: Revenue is recognized when cash is received.
Revenue realized during an accounting period is included in the income.

Accounts receivable:

Accounts receivable are legally enforceable claims for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but not paid for.

These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer for goods and services that the customer has ordered.

Examples:

The sales a business has made.
The amount of money received for goods or services.
The amount of money owed at the end of each month varies (debtors).

The accounts receivable team is in charge of receiving funds on behalf of a company and applying it towards their current pending balances.

Collections and cashiering teams are part of the accounts receivable department. While the collections department seeks the debtor, the cashiering team applies the monies received.

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