Explain the revenue and expense recognition principles with an example. Within this respect, explain also why...

Explain the revenue and expense recognition principles with an example. Within this respect, explain also why unearned revenues cannot be revenues but liabilities.

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Revenue and expense recognition principle state that revenues and expenses should be recorded in the books when they are accrued irrespective of amount received or paid. If a revenue of $100 is not received but it is earned by providing the services, such revenue will be recorded irrespective of cash revenue according to revenue and expense recognition principle. Same with the expenses, if services are provided by employees and the salaries are not yet paid, the salaries expense is recorded irrespective of payment according to revenue and expense recognition principle. The main consideration is whether the services and expense are provided or not irrespective of cash receipt and payment.

Unearned revenues are incomes received in advance for which the services has to be provided. Since the service is not yet provided, the amount received in advance cannot be treated as revenues. When the service is provided, such amount received in advance can be treated as revenue. Until then the amount received in advance is treated as unearned revenues and reported as a liability.

ekkarill92 answered 1 year ago

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