WEEK 3b: REVENUE RECOGNITION

Revenue recognition

Profit is only realized when control of goods passes to the buyer.

Accruals concept

Revenue must be matched to the period in which it was earned.

Cash sales

Sales where payment is received immediately upon delivery of goods.

Credit sales

Sales where goods are delivered but payment has not yet been received.

Capital expenditure

Tends to be for one-off or irregular purchases with benefits lasting more than 12 months.

Revenue expenditure

Tends to be for frequent purchases with benefits lasting 12 months or less.

Depreciation

The method of allocating the cost of a tangible asset over its useful life.

Straight-line method

A depreciation method where the same amount is charged each year.

Reducing balance method

A depreciation method where a fixed percentage is applied to the book value of the asset.

Amortization

Depreciation on intangible assets.

Pre-paid expenses

Costs that have been paid in advance but not yet incurred.

Sales commission

The commission earned by a business for selling a product or service, typically a percentage of sales.