Time Period Assumption - Requires that companies recognize revenue in the accounting period in

which the performance obligation is satisfied.

- Accountants divide the economic life of a business into artificial time
period Expense Recognition Principle

Interim Periods - Dictates that efforts (expenses) should be matched with results
(revenues)
- Monthly and Quarterly time periods

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- Time period that is 1 YEAR in length ( first day of the month until 12
months later which is last day of the month)

Calendar Year

- January 1 to December 31

ACCRUAL – VERSUS CASH – BASIS ACCOUNTING

Accrual-Basis Accounting

- Companies record transactions that change a company’s financial

statements in the periods in which the events occur.
- Companies recognize revenues when they perform services rather than
when they receive cash payment
- Recognizing expenses when incurred rather than when paid

Cash-Basis Accounting

- Companies record revenue when they receive cash

- Record expense when they pay out cash

REVENUE AND EXPENSE RECOGNITION PRINCIPLE

Revenue Recognition Principle

 ADJUSTING ENTRIES

Adjusting Entries are classified either as deferrals or accruals.

ADJUSTING
ENTRIES

Deferrals Accruals

Accrued
Prepaid Revenue Accrued
Unearned Expenses
Expense revenues for
Revenue expenses
expenses paid services
cash received incurred but
in cash before performed but
before services not yet paid
they are used or not yet received
are performed in cash or
consumed in cash or
recorded recorded