Accrued income refers to revenue created through the provision of a good or service but for which no money has been transferred. Although cash is not collected, the accrual accounting technique reflects revenues as they are received. As an illustration, Starbucks signs a ten-year lease for a commercial facility. According to their agreement, Starbucks will be paid after each calendar year. Despite the fact they have not received any money, the retail leasing company records revenue earnings every month. Revenue is recognized as soon as the service or product is supplied to the customer (Reimers, 2011). According to the revenue accounting concept, earnings ought to be documented as it is earned rather than after it has been deposited. As a result, the total of a receipt you make for a client for services or commodities is noted rather than when money is received from the consumer. The reason for this is that financial reporting includes the revenue recognition concept.
Accounting students might find it difficult to comprehend how the concept of cumulative profits as well as its applicability to the revenue recognition process operates. This is because accrued gains are reported as they occur even when cash is not remitted. The client may arrange with the service provider to pay a lump sum after the service is under their agreement. On the other hand, revenue recognition happens after the company has fulfilled its contract with the customer (Bock, 2022). Connecting accrued accounting and revenue recognition could be challenging since one might think revenue should be recorded if a service is allowed or provided. However, this is not how accrued accounting and revenue recognition work.
The principle of revenue recognition in my opinion, is critical since it assists accounting personnel in determining whether to accurately report earnings for a given period. To achieve revenue recognition goals, accounting professionals must take the following actions: make contact with a client, and recognize revenue when or as the debt is paid. Moreover, they should display and allocate the transaction price and identify performance obligations.
References
Bock, M. (2022). The revenue recognition principle: Definition & examples. The Motley Fool. Web.
Reimers, J. (2011). Financial accounting: A business process approach (3rd ed., pp. 1-648). Pearson.