Unit 2 Chapter 3 (Lesson 2 Recognizing Revenue & Expenses)

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Recognizing Revenue & Expenses

Recognizing Revenue
Recognizing Expenses
Why Proper Recognition Matters

Recognizing Revenue & Expenses

Recognizing revenue and expenses means deciding when to record them in your books. The timing of this recognition depends on the accounting method you use (cash or accrual), but under accrual accounting, the process follows more specific rules.

“Revenue is recorded when it is earned, and expenses are recorded when they are incurred—not necessarily when money changes hands.”

Let’s break that down further.

1.Recognizing Revenue

In accrual accounting, revenue is recognized when the work is done or the product is delivered, even if the customer pays later. This ensures your income reflects when it was actually earned.

Example: If you complete a service in August but the client pays in September, the revenue is recorded in August—the moment it was earned.

2. Recognizing Expenses

Expenses are recognized when they are incurred—that is, when the service is used or the product is received. It doesn’t matter if the bill is paid later.

Example: If you receive a bill for utilities in December but pay it in January, the expense is still recorded in December—when you used the electricity.

3. Why Proper Recognition Matters

Recognizing revenue and expenses in the correct period ensures your financial statements reflect true business activity. This gives a more accurate view of profitability, performance, and helps meet accounting standards like GAAP or IFRS.

Improper recognition can lead to misleading reports—for example, showing high profits in one month when the income wasn’t actually earned yet.

Key Takeaways

✅ Revenue is recorded when earned, not when cash is received
✅ Expenses are recorded when incurred, not when paid
✅ Proper recognition gives a true view of profitability
✅ This rule applies under accrual accounting, not cash basis
✅ Accurate recognition keeps your books clean and compliant