Financial Intelligence
Correct Revenue Recognition Policy
The correct Revenue recognition policy infers to the principle that identifies the specific terms in which revenue can be recognized and accounted for. In most cases, income is recognized when a serious event happens in a firm, and the expenditure is easily measurable to the organization.
The policy requires that revenues are supposed to be recognized when income is generated and realized, and not when money is received. Revenue being realized means that the customers should receive services and goods, but compensation for the services and products should be expected in the future. On the other hand, earned revenues only account for the services that have been provided by the company.
Therefore, for the policy to be correct, the activities used to generate revenue must be fully complete so that it can be recognized in the revenue. Moreover, a rational level of inevitability that is used to earn the revenue should be present. Furthermore, the revenue should be recorded in the same accounting period. For instance, revenue accounting is forthright when an item is traded, and the revenue is recognized when the purchaser pays for the item.
Business Case of Revenue Mismatch with Cost
Revenue mismatch in revenue recognition comes with its effects because the cost of a company’s product fails to tie directly to the revenue-generating process of the firm. The revenue matching policy assumes that every cost is directly linked to an income-generating event. For example, when these costs are recognized, it depends on what services or goods are related to the price in the period.
If a firm generates services that it is unable to sell in the market, the costs that are associated with the production of those items becomes an expense when the products become used or consumed. So if a firm produces items that it cannot sell, the production expenses become expensed once it comes clear that the product cannot be sold. Due to this process, the revenue mismatches with the cost incurred to produce the items. The mismatch manipulates the accounting expenses that include administration and development costs.