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Also i am not a native English speaker and that’s the reason for the request. 🙂
Income statement is prepared on the accruals basis of accounting.
This means that income (including revenue) is recognized when it is earned rather than when receipts are realized (although in many instances income may be earned and received in the same accounting period).
Conversely, expenses are recognized in the income statement when they are incurred even if they are paid for in the previous or subsequent accounting periods.
My confusion lies in understanding these sentences:
1 : Income is recognized when it is earned rather than when receipts are realized.
2 : expenses are recognized when they are incurred even if they are paid for in the previous or subsequent accounting periods.
Please explain this in a way that is a bit easy to understand.
Thanks and kind regards.
1. Suppose you sell goods on credit for $1,000 near the end of the year, but we do not receive the money until early next year.
We earned the money this year and so it appears as part of our sales for this year (i.e. we recognise the income this year), and not when we actually receive the money.2. In the same way, we record any expenses this year of running the business even if we actually make the payment next year (or we made the payment in advance last year).
For more, do watch my free lectures on accruals and prepayments. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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