Mary Bolton believes revenues from credit sales may be earned before they are collected in cash.
In basic accrual accounting: revenue is recognized when it is earned and this could be before or after payment is received from a customer or company. In a basic transaction, like a purchase in a store, the income is earned at the time the sale while at the cash register. When merchandise is shipped the invoice will dictate if the revenue is earned at time of shipment or at the time of receipt by the customer. There’s COD, prepaid, and payment when fulfilled.
According to the revenue recognition policy, revenue must be realized or realizable and earned to be recognized on the income statement as income. Realization is when cash or the right to cash is received. Therefore, revenue can be accrued to match the expenses that were incurred to render the service but not recognized on the income statement until payment is received. Mary is correct but it an accrued revenue that is accounted for and not income.
"Financial Times" Guide to Personal Tax 2007-2008
In basic accrual accounting: revenue is recognized when it is earned and this could be before or after payment is received from a customer or company. In a basic transaction, like a purchase in a store, the income is earned at the time the sale while at the cash register. When merchandise is shipped the invoice will dictate if the revenue is earned at time of shipment or at the time of receipt by the customer. There’s COD, prepaid, and payment when fulfilled.
According to the revenue recognition policy, revenue must be realized or realizable and earned to be recognized on the income statement as income. Realization is when cash or the right to cash is received. Therefore, revenue can be accrued to match the expenses that were incurred to render the service but not recognized on the income statement until payment is received. Mary is correct but it an accrued revenue that is accounted for and not income.
"Financial Times" Guide to Personal Tax 2007-2008
