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 uh I just want to make that distinction that when you're a T shirt company and you sell uh t shirts, that's revenue. But compare that to if you're a T shirt company and you have 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 while 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 gap. Okay. So what does that mean while 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 when you have the T shirt in your hand and you hand it to the customer. That's when you delivered. Right? Regardless of if the customer is gonna 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 going to 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, that one hour two 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 record. It's whatever the customer paid for it. What did the customer paid 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. Alright, let's do that now.

Alright. So let's continue here with expense recognition. And remember that expenses, these are the value of goods and services that the company that we receive, right, compare that to revenue revenue. We are providing services to others expenses. Were receiving services from others. Okay. So generally what's gonna happen is we got to incur expenses to earn revenue. Right? There's gonna be some sort of expenses we need, we're gonna need sales people. We're gonna need people at the cash register. We're gonna need tutors to be the tutors, right? All sorts of expenses to be able to sell the product to the customer. Okay. So what we use in gap is what's called the matching principle. Okay, The matching principle tells us when to record expenses. So we have the revenue recognition principle for revenue and the matching principle for expenses. Okay, So when do we record expenses? So this is the whole thing with the matching expenses are recorded in the same period as their related revenues. Okay, so the idea here is that we're matching, we're matching the expenses to the revenues. And that makes sense. Right? We earned this this revenue in this period. Well, we want to know in this period. What did it cost us to earn that revenue? Right. We sold these t shirts, but what did it cost us during this period. Right. So we want to consider all the expenses during the period that we earned the revenue as the expenses for that period. So generally the way we want to think about it is when we receive the benefit. Okay. So think about when we receive the benefit and that's when we need to record the expense. Okay? So we're gonna see some examples of different expenses and when we record them as we continue. But just as an example, um let's say you pay for a rental agreement, right? You pay for a rental agreement for a whole year. Well, let's think about if we're just doing the first month of the rental agreement, we don't want to include the whole expense of the whole year, right? We want to only include the one month that's passed, right? So we want to match when we earn when we receive those benefits, right? The benefits of renting the space and using the space. We want to take those expenses as they come. Okay. So we would take uh one month's worth of the expense, so like 1/12 of the expense each month throughout the year. Okay. So we'll see more details about that. But the idea here is that just matching those revenues with the expenses. Okay. So we we want to take the expense when we receive the benefit. So I want to make a quick note about expenses here, is that sometimes students get tripped up with this, that we don't always pay cash, right? Some expenses are gonna be paid in cash, right? Maybe we just had employees work for two weeks and then we paid them and the expense came up and we paid them, right? And we have the cash the expense right there. But other other times it's not just gonna be for paying for something with cash. Sometimes we're using up an asset, such as supplies. Okay? So we might have a supply closet full of office supplies, pens, papers, no pads, clipboards, whatever. And throughout the years we're grabbing stuff out of the closet and using it up. Well, we have to take an expense for all this stuff that we've used up since we used it during this period. We received the benefit of using those supplies during this period. Excuse me. Then we have to take the expense this period. Okay? So some are paid in cash. Some were using up an asset. Sometimes we create a liability right? Sometimes we receive the benefit for something but we haven't paid for it yet. So we'll have to create a liability for that. And I just want to note that it's the occurrence of the event, right? That event being us receiving some sort of benefit that causes the need of the expense record. Okay. It has nothing to do with the cash outflow. Okay. And that's the whole difference between accrual accounting and cash basis accounting is, well, sometimes it does line up with the cash, but not always right. Sometimes we have things like this where we're using up an asset, creating a liability, things like that. Alright, So let's pause here and then try this practice problem on the page