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Financial & Managerial Accounting
Found in: Page 29
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Why is the revenue recognition principle needed? What does it demand?

Revenue recognition is a principle that states that revenue should be recognized when it is earned and its amount can be calculated correctly.

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Step by Step Solution

Need for revenue recognition

The principle of revenue recognition provides guidance to the financial manager and auditors so that they know when to recognize the revenue of the company. If the revenue is recognized early, then it will show books more profitable but when they are recognized late, then books look less profitable.

Demand for revenue recognition

The revenue recognition principle demands that revenue should be recognized at the time it is earned and it is measured accurately.

Most popular questions for Business-studies Textbooks

Sanyu Sony started a new business and completed these transactions during December.

Dec. 1 Sanyu Sony transferred $65000 cash from a personal savings account to a checking account in the name of Sony Electric in exchange for its common stock.

2 The company rented office space and paid $1000 cash for the December rent.

3 The company purchased $13000 of electrical equipment by paying $4800 cash and agreeing to pay the $8200 balance in 30 days.

5 The company purchased office supplies by paying $800 cash.

6 The company completed electrical work and immediately collected $1200 cash for these services.

8 The company purchased $2530 of office equipment on credit.

15 The company completed electrical work on credit in the amount of $5000.

18 The company purchased $350 of office supplies on credit.

20 The company paid $2530 cash for the office equipment purchased on December 8.

24 The company billed a client $900 for electrical work completed; the balance is due in 30 days.

28 The company received $5000 cash for the work completed on December 15.

29 The company paid the assistant’s salary of $1400 cash for this month.

30 The company paid $540 cash for this month’s utility bill.

31 The company paid $950 cash in dividends to the owner (sole shareholder).

Required Analysis Component 4. Assume that the owner investment transaction on December 1 was $49,000 cash instead of $65,000 and that Sony Electric obtained another $16,000 in cash by borrowing it from a bank. Compute the dollar effect of this change on the month-end amounts for (a) total assets, (b) total liabilities, and (c) total equity.

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