XACC 280\Week 3 - DQ 1 and 2
The revenue recognition principle states that revenues are recognized by the firms in the accounting period in which it is earned. In a service firm, revenue earned by the company is considered to be earned when the service is performed.
Let’s take an example of Dave’s Dry Cleaning, Inc., assuming that nothing is cleaned by the company on a certain date let’s say June 30, however, customers pay for their clothes in the first week of July. According to the revenue recognition principle, revenue will be earned when Dave performs the task that is in June, instead of in July when the cash was received. At June 30, a receivable on its balance sheet and revenue in its income statement will be reported by Dave on June 30 for the service it performed.