![]() ![]() Recording revenues when they are earned by providing goods or services to customers. In this case, cash is paid before an expense is incurred.Īccruals and deferrals can be summarized as follows:Īccounting method that records revenues when earned and expenses when incurred without regard to when cash is exchanged. ![]() In addition, businesses may pay for goods or services before receiving those goods or services from the supplier. In this case, cash is received before revenue is earned. When cash is received for goods or services before the recognition of a revenue, or when cash is paid for goods or services before the recognition of the expense, it is called a deferral.īusinesses may also receive cash from customers before the delivery of goods or services to the customer. In this case, expenses are incurred before cash is paid. This is because a business may provide goods and services to customers “on account.” In this case, the business has earned revenue before it has received cash from the customer.Ī business may also purchase goods and services from suppliers on account. In many instances, when a company uses cash accounting, its financial statements do not present an accurate picture of how the company is performing. It is possible for a business to record revenues only when cash is received and record expenses only when cash is paid. When revenues are earned before cash is received or expenses are incurred before cash is paid, it is called an accrual. In other words, expenses should be recorded when they are incurred, regardless of when they are paid. The matching principle states that expenses should be matched with the revenues they help to generate. ![]() The revenue recognition principle states that revenues should be recognized, or recorded, when they are earned, regardless of when cash is received. ![]()
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