Elements of Income Statement
Revenues and expenses are the elements of income statement.
1. Revenue represents an increase in resources from the operations of an entity
2. Increase in resources may be (A), (B) or (C)
(A) Increase in assets
(B) Decrease in liabilities
(C) Both (A) and (B)
Recognition of revenue
1. Recognition means “recording” in accounting
2. Revenue is reported when it is recognized
3. Revenue is recognized when it is earned and realized (or realizable)
4. Realized means the collection of cash
5. Earned means the delivery of products or services
Revenue Recognition Principle
U.S. GAAP Codification Topic 605: Revenue
Revenues are recognized when (a) realized or realizable and (b) earned.
–> not recognized until realized or realizable.
–> not recognized until earned.
Revenues are realized
–> when products are exchanged for cash or claims to cash.
Revenues are realizable
–> when related assets received are readily convertible to cash or claims to cash.
1. Expenses are recognized in the same period when related revenues are recognized.
2. This principle is called as “Matching Principle.”
3. Matching expenses with related revenues.
Normal balances of revenue accounts
1. Revenue accounts have normal balances on the credit side
2. Increases in revenue accounts are recorded on the credit side
3. Decrease in revenue accounts are recorded on the debit side
Normal balances of expense accounts
1. Expense accounts have normal balances on the debit side
2. Increases in expense accounts are recorded on the debit side
3. Decrease in expense accounts are recorded on the creidt side