Question

FASB's Concepts Statement No. 5 and find the definition for recognition. How does this differ from realization? How does the difference between these two provide a more fair presentation of an organization's financial status?

Answer 1

DEFINITION

Statement of Financial Accounting Concepts No. 5 Recognition and Measurement in Financial Statements of Business Enterprises

Statement of recognition and measuement is an important FASB concept.This Statement sets forth recognition criteria and guidance on what information should be incorporated into financial statements and when. The Statement provides a basis for consideration of criteria and guidance by first addressing financial statements that should be presented and their contribution to financial reporting. It gives particular attention to statements of earnings and comprehensive income. The Statement also addresses certain measurement issues that are closely related to recognition.

Difference between  recognition and realization

• Realization starts where recognition ends

• Recognition is always an estimation while recognition provides accuracy.

• Recognition is not dependent on business pattern but realization is different in cash and credit type.

• Recognition is used to see where company is heading but realization clearly shows it.

• Recognition can be manipulated by deferring expenses but realization can not be manipulated

does the difference between these two provide a more fair presentation of an organization's financial status

When we realize a transaction we convert it into actual cash. In other words, we will realize a transaction before we recognize it. The recognition does not happen until the actual transaction takes place. In accounting, the realization conversion states that the revenue should only be recognized when realized.

What realization principle actually means that the revenue is recognized before cash is received. The revenue on the profit and loss statement will include revenue from transactions where cash has not being received. This translates to total revenue and cash from operations will not match. This is called accrual basis of accounting. Accrual basis of accounting is the generally accepted accounting principle (GAAP).The opposite of accrual basis accounting is cash basis accounting. In cash basis accounting, transactions are only recorded when cash exchanges hand. This is used by very small businesses for easy record keeping.So these two principles od recogniton and realization helps to identify and analyse the financial statements easily ,interpret comprehensively and to assess it better providing present and future status of business.