Accountancy - Matching Concept for Revenue

According to the Matching Concept for Revenue, cost incurred to earn revenue is recognized  as an expenditure only during the period when the revenue is recognized as having been earned, i.e , we match the expenditure to the related revenue. This has three aspects : -

• As revenue is recognized as income, related expenditure is considered as an expense in the profit and loss account;
• Expenses pertaining to revenue, which are to be earned in next accounting period are carried forward as deferred expense in Balance Sheet and treated as an expense only in next year;
• Advance revenue received is to be treated as income in the year when the corresponding services are provided or property in goods is transferred.

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Accountancy - Revenue Recognition Concept

According to the revenue recognition concept, in order to recognize revenue from a transaction, there are two things which should have occured, namely : -

• Transaction should have been entered into;
• Right to receive the payment must be established.

The revenue recognition event need not necessarily occur with the event of collection of cash. Once the above two factors are established, even if the cash is received at a later point in time, it does not make any difference to the recognition of revenue. The undermentioned video explains the concept of revenue recognition in detail. You can also visit our website, www.iedubook.com to watch many more videos on Accountancy. Have a happy learning.