3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Alright. So now let's dive a little deeper into when we recognize revenue which means recorded on our books and also recognize expenses in Gap. Right? When does Gap require us to record revenue and expenses? Let's check it out. So let's start here with revenue. And remember that revenue is the value of goods or services that we provide. Right? So when we provide a good or service to our customer we earn revenue. Right? And revenue is the money that comes in from that. And the selling of these goods and services, well that's why we're in business. Right? That's the whole point. And this revenue is related to that why we're in business. If we sell t shirts, if we're a t shirt company, well, that revenue comes from selling t shirts. Right? So that's a, I just wanna make that distinction that when you're a t shirt company and you sell, t shirts, that's revenue. But compare that to if you're a t shirt company and you some machine that you use to produce t shirts, and you sell that machine. Well, you're not in the business of selling machines. Right? That's gonna be something different. That's not technically revenue when we sell, say, some other thing that's not related to our business. Okay? So these goods and services are the reason we're in business and these revenues, well they're generally just cash inflows from customers, but sometimes we sell things to customers on account. Right? And we have accounts receivable, things like that. There's other ways to earn the revenue, but most of the time we're just gonna get cash. So the revenue recognition principle, and this is gap. Gap tells us this and requires us when and how to record revenue. It comes from this revenue recognition principle. So let's see what it says. When do we record revenue? Well, revenue is recorded when it is earned based on GAAP. Okay? So what does that mean? Well, revenue is earned when the business has delivered its end of the bargain. Okay? It's end of the bargain. So with that t shirt company. Right? When the cut When you have the t shirt in your hand and you hand it to the customer, that's when you deliver. Right? Regardless of if the customer is going to hand you cash right now or give you an IOU to pay you in the future, you've done your part of the transaction. Right? You gave the customer the t shirt. Well, your job is done. Just like with a tutoring company, let's say, because it's a service not a physical product. Well, with a tutoring company, when the tutoring session is done. Right? Regardless of if the customer is gonna pay you at the end of the session or pay you in advance or pay you later, you earn the revenue when that tutoring session is finished. Right? The that 1 hour, 2 hours past, you've earned the revenue. Okay? So how much revenue do we record? Well, the amount of revenue we record is the value of the good or service provided to the customer. Right? And generally, it's pretty easy to think how much revenue we record. It's whatever the customer paid for it. What did the customer pay for it? That's the amount of revenue. Okay? So if they paid $10 for the t shirt, we get $10 of revenue. If they paid $50 for the tutoring session, you get $50 of revenue. Right? So you just find the value of what you provided to the customer and what they gave to you. That is the revenue. Cool? Alright. So let's pause right here and then we'll continue with the expense recognition principle. Right? Let's do that now.