Final answer:
Revenue is recognized under the earnings approach when a firm sells its products, and it is calculated by multiplying the selling price by the quantity sold. Explicit costs are subtracted from this total to determine accounting profit.
Step-by-step explanation:
Under the earnings approach, revenue recognition is typically based on the principles that revenue is recognized when it is realized or realizable, and when it is earned, regardless of when the cash is received. In practice, this means that when a firm sells its products, the income generated from the sale is recognized at the time of the transaction, not necessarily when the payment is received. The calculation of total revenue is straightforward: it is the product of the price at which goods or services are sold and the quantity sold, given by the formula Total Revenue = Price x Quantity.
Furthermore, understanding the difference between explicit costs and implicit costs is essential in determining the accurate profit of a firm. Explicit costs represent the clear, direct out-of-pocket expenses, such as wages or material costs, while implicit costs account for the opportunity costs associated with a firm's use of its own resources. To calculate the accounting profit, explicit costs are subtracted from the total revenue.