UNDERSTANDING ACCOUNTING TALK 31 When are transactions entered into the Financial Statements?

The commonly used term in accounting to indicate the entry of transactions or items into the Financial Statements is “recognition.” As a general rule, a transaction or an item is entered into the Financial Statements (or Books of Accounts) when:

there is a reasonable expectation or probability that a future economic benefit can be derived from the transaction or item,

the transaction or item can be reliably measured in monetary terms,

There are several methods for recognition of Revenues:

Cash, i.e., when a cash payment is received

Production, i.e., when the product is produced

Installment, i.e., every time a payment is made or a collection is obtained

Cost Recovery, i.e., when a payment or collection exceeds the cost of the product

Percentage, i.e., as a percentage of the work accomplished.

There are also several methods for recognition of Expenses:

Direct Matching, i.e., costs are recognized in the same period in which a revenue is recognized

Rational Allocation, i.e., as in depreciation expense related to a fixed asset

Immediate; i.e., as in general & administrative expenses (salaries, office supplies, etc).