Question

In determining the profit of an​ entity, which one of the following measurement principles states that revenue and expenses are recognised as they are earned or​ incurred, and not as money is received or​ paid?

Answer 1

The accrual accounting principle is used to determine profit by recognizing revenue and expenses as they are earned or incurred. Profit is defined as Total Revenue - Total Cost, considering both explicit and implicit costs for economic profit, whereas accounting profit includes only explicit costs.

Step-by-step explanation:

• In determining the profit of an entity, the measurement principle that states that revenue and expenses are recognised as they are earned or incurred, and not as money is received or paid, is known as the accrual accounting principle. This principle is fundamental to gauging the true financial performance of a business, as it records transactions when they actually occur, irrespective of when cash transactions happen.

• Each business, irrespective of size, strives to earn profit, which is calculated as Profit = Total Revenue - Total Cost. In the context of accounting and economics, there are two kinds of profit: accounting profit, which is concerned with explicit costs, and economic profit, which also includes implicit costs. While accounting profit is a measure of cash flow, economic profit provides a broader understanding of financial health, considering all costs.