Multiple Choice
The materiality constraint, as applied to bad debts, means that:
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3. Accrual Accounting Concepts
Revenue Recognition and Expense Recognition
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The core revenue principle states that revenue should be recognized:
A
when expenses related to the revenue are paid
B
only when cash is received from customers
C
at the end of the accounting period, regardless of performance
D
when it is earned and realizable, regardless of when cash is received
Verified step by step guidance1
Understand the core revenue principle: Revenue is recognized when it is earned and realizable, regardless of when cash is received. This principle ensures that financial statements accurately reflect the company's performance during a specific period.
Clarify the term 'earned': Revenue is considered earned when the company has performed the service or delivered the goods to the customer, fulfilling its obligations under the contract.
Clarify the term 'realizable': Revenue is realizable when it is reasonably certain that payment will be received, even if cash has not yet been collected.
Distinguish this principle from cash-based accounting: Unlike cash-based accounting, which recognizes revenue only when cash is received, the revenue principle aligns with accrual accounting, focusing on the timing of earning and realizability.
Apply the principle in practice: When preparing financial statements, ensure that revenue is recorded in the period it is earned and realizable, regardless of the timing of cash receipts, to provide an accurate representation of the company's financial performance.
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