Unit 2: Revenue Recognition Introduction

Vocabulary terms and core accounting definitions based on Unit 2: Revenue Recognition lecture notes and practice exercises.

Revenue

Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Expenses

Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or conducting other activities that constitute the entity’s ongoing major or central operations.

Periodicity

Also known as the time period assumption, this principle implies that a company can divide its economic activities into artificial time periods.

Revenue Recognition Principle

The accounting requirement that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Expense Recognition Principle

Also known as the matching principle, it states that expenses should be recorded in the same accounting period as the related revenue to match costs with accomplishments.

Accrual Accounting

A method of accounting required by US GAAP where events are recorded as they occur, not necessarily when cash changes hands.

Income Statement

A financial statement that reports the performance of an economic entity for a period of time, consisting of revenues, expenses, gains, and losses.

Sales Returns and Allowances

A contra-revenue account used to record actual or estimated reductions in sales due to product defects or related customer issues.

Allowance for Sales Returns and Allowances

A contra-asset account recorded against accounts receivable for estimated future reductions in the receivable when a credit note has not yet been issued.

Net Sales

The figure calculated by subtracting contra-revenue accounts, such as Sales Returns and Allowances, from gross sales revenue.

Gross Profit

A financial performance measure calculated by subtracting the Cost of Goods Sold from Net Sales: $\text{Net Sales} - \text{Cost of Goods Sold}$.

Deferred Revenue

A liability on the balance sheet representing money received from a customer for services that have not yet been earned or provided.

Perpetual Inventory System

An inventory system where the cost of goods sold and inventory levels are updated immediately at the time of a sale.