Question

The income statement is an important financial statement used by individuals who are interested in the operations of a business. Explain how the accounting period concept and the revenue and expense recognition criteria provide guidance to accountants in preparing the income statement. Your answer should include the role of adjustments.

Must be a minimum of 500 words

Answer 1

An income statement is a financial statement which is prepared to know about the profitablility of business over a given reporting period or accounting period. It shows company's revenue minus expenses and losses and gives profit or loss for that accounting period. It is considered as one of the three important financial statements which are used for reporting a company's financial performance over a specific accounting period along with other two key statements i.e the balance sheet and the statement of cash flows. It shows how much profit a business generates during a particular accounting period and the amount of expenses incurred in earning that revenue.

Accounting period concept is related to accounting period of any organisation which can be a calender year or fiscal year, quarterly, monthly or semi-annually. Accounting period is the span of time that covers a set of financial transactions over a specific period selected by that organisation to record and report the transactions and performance. This concept provides guidance and a systematic way of recording and reporting the financial transactions as accountant can know better about their financial performance of a particular period as without specifying the period of reporting and recording no one can give right judgement and actions to improve or control the situation. So, to make financial statements comparable, meaningful and understandable accounting period concept is useful in preparing income statement.

Revenue and expense recognition concept is related to recognition of revenue when earned and payment is assured and not related to receiving cash and expenses are recognized when incurred and the revenue associated with the expense is recognized. It basically follows accrual concept instead of cash basis accounting and under accrual concept all transactions whether cash or credit are recorded related to a particular accounting period. The revenue recognition principle, requires that revenues are recognized on the income statement in the period when realized and earned while not necessarily when cash is received and similarly for expenses so that accurate and comparable results can be obtained for. a specific period called accounting period. Earned revenue means revenue for goods or services that have been provided or performed.The assets or goods produced and sold or services rendered to generate revenue also generate related expenses. It makes companies to use the accrual basis of accounting and match all expenses with revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period.

So, we can say that both accounting period concept and the revenue and expense recognition concept provides correct guidance to accountants in preparing income statement or any other financial statement as without these concepts or accounting principles correct accounting can't be done and can give misleading results. If accounting period concept is not followed then we cannot judge the financial performance of any organisation as without a specific period we cannot find correct profit or loss and cannot compare it with others. Without revenue and expense recognition concept or principle, we cannot estimate revenue and expense for a particular period and cannot do right accounting for the same for a particular time period.