Recognition - Intermediate Accounting - Lecture Slides, Slides of Accounting

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Learning Objectives

• 1. Understand the concept of

recognition

Recognition

• Recognition is the process of formally recording or incorporating an item into the financial statements of an entity
• ex. Area development fees

Accounting recognition must

• Identify and measure
• events, transactions and circumstances
• that should be captured
• in the accounting information system

Learning Objectives

• 2. Interpret the recognition criteria for

assets and liabilities

To be included, an item must...

• 2. Be measurable, relevant and reliable

Cash versus accrual based accounting

• Cash receipts and disbursements are recognized when they occur
• and in CASH BASED accounting
• revenues and expenses are recognized when the cash changes hands

An event should be recognized

when four criteria are met:

• 1. The item must meet the definition of an asset or a liability
• 2. The item must be relevant
• 3. The item must be reliable
• 4. The item must be measurable

Learning Objectives

• 3. Interpret the recognition criteria for

revenues

To be recognized...

• Revenues must be:
• 1. Realized or realizable
• 2. Earned

Realized

• Products or services are exchanged for cash or claims to cash - Realizable
• When related assets received or held are readily convertible to known amounts of cash or claims to cash

Revenues are EARNED

• when the entity has substantially completed

Revenues are EARNED

• when the entity has substantially completed what it must do to be entitled to the benefits

The value-adding process

(a black box)

• The inputs include:

Material

Labor

Capital

The value-adding process

(a black box)

• At the end of the process
  • the product is sold
• and cash is received

? Product