How Does a Company Recognize a Sale and an Expanse
In accounting, recognizing a sale
and an expense follows specific principles, primarily influenced by the method
of accounting used (cash basis or accrual basis). Here's how a company
typically recognizes each:
Recognizing
a Sale
- Accrual Basis Accounting:
- When:
A sale is recognized when the product or service is delivered, and the
earning process is complete, regardless of when payment is received.
- How:
- The company records the
revenue in its financial statements.
- It may create an account
receivable if payment is to be received later.
- Example: If a company sells a
product on credit in March, it recognizes the revenue in March, even if
the customer pays in April.
- Cash Basis Accounting:
- When:
A sale is recognized when cash is received.
- How:
- The company records the
revenue only upon receipt of payment.
- Example: If a company sells a
product in March but receives payment in April, the revenue is
recognized in April.
Recognizing
an Expense
- Accrual Basis Accounting:
- When:
An expense is recognized when it is incurred, which usually occurs when
goods or services are received, regardless of when cash is paid.
- How:
- The company records the
expense in its financial statements.
- It may create an account
payable if payment is to be made later.
- Example: If a company
receives a service in January but pays for it in February, the expense
is recognized in January.
- Cash Basis Accounting:
- When:
An expense is recognized when cash is paid out.
- How:
- The company records the
expense only when payment is made.
- Example: If a company
receives a service in January but pays for it in February, the expense
is recognized in February.
Summary
- Sales Recognition:
Under accrual accounting, sales are recognized when earned (goods/services
delivered), while under cash accounting, they are recognized when cash is
received.
- Expense Recognition:
Under accrual accounting, expenses are recognized when incurred (when
goods/services are received), whereas, under cash accounting, they are
recognized when cash is paid.
Understanding these principles helps
businesses accurately report their financial performance and comply with
relevant accounting standards.