Generally Accepted Accounting Principles: This question post with a minimum 100-word count requirement.This week we have...

Generally Accepted Accounting Principles: This question post with a minimum 100-word count requirement.This week we have learned about four of the generally accepted accounting principles – revenue recognition, expense recognition, the matching principle, and the historical cost principle. Briefly explain what is meant by each of these and how they are applied to accrual accounting.

Expert Solution

Revenue recognition: Revenue is recognized in accounting if its necessary performance obligations are complete. Suppose a company receives order for the sale of goods of $20,000; receiving such order can’t establish sales revenue; the company has to deliver the goods to the buyer; such delivery is the performance obligation here; after such delivery, the company can make the entry of $20,000 sale in the books of accounts. This is the way of application to accrual accounting.

Expense recognition: Expense is recognized as and when it is incurred. Suppose an insurance policy is taken in this year 1^st October and for which the premium is paid for $1,200 for a year; the financial year ends at 31^st December every year; in case of accrual accounting the premium would be charged to account for (October to December =) 3 months for this year; premium = 1,200 × (3/12) = $300.

Matching principle: This is the matching of expense with the required revenue of a year. If the accrual method of accounting is maintained, such matching is compulsory for true and fair disclosure of profits and accounts. Suppose there is a merchandise expense of $20,000 of which sales would be made in the following month for $32,000; since the sale is not in this month, that expense must not be treated in this month.

Historical cost: machines and assets are recorded in earlier original cost or historical cost but not in the current market price; this principle is very important in the accrual basis since such value is authentic and vouchers could be provided for checking.

ekkarill92 answered 3 months ago

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