Question

Explain what recognition in financial statements is and describe the general criteria for recognising an income and an expense in financial statements

Answer 1

Recognition can be defined as a way in which income statements or the balance sheet incorporates an item or element which satisfies the following mentioned criteria for the process of recognition:

1) any profit or any type of economic benefit received in future fro it would be flowing from the entity or flowing to the entity.

2) It would be realible to measure the cost of the item.

Based on the above description, assets, liabilities, incomes and expenses are recognised.

Let us describe the criteria for recognising income and expenses in a financial statements

Income :

Income is being recognised if there is an increment in the economic benefits in the future which is related to the increase in assets or decrease in liabilities and whose measuring is also realible.

Incease in assets or decrease in liability ultimately leads to making profit that is income for the organisation.

Like we can see this through an example, any goods being sold to the customers, then there is increase in cash which is an asset which means there is income.

Another example we can take is when any debt which is to be payable is being cleared or payed, then there is a decrease in liability, which means there income is recognised

Expense:

Expense is being recognized if there is an decrease in the economic benefits in the future which is related to the decrease in assets or increase in liabilities and whose measuring is also reliable.

This situation ultimately leads to loss which is an expense for the organisation.

Like for example, an asset depreciates and hence asset value decreases which indicates an expense.