Final answer:
Revenue is the income earned by a business and can be recognized even in the presence of uncertainties, which might be accounted for separately. This ties into understanding explicit and implicit costs and their impact on accounting profit. Recognition of revenue amidst uncertainties is managed by accruing potential expenses or reducing the reported revenue.
Step-by-step explanation:
Revenue is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income. Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it. Typically, revenue is recognized when a critical event has occurred, and the dollar amount is easily measurable to the company.
However, when there is uncertainty related to the revenue, companies may opt to acknowledge the revenue but also account for the uncertainty as a potential expense or a reduction in revenue. This concept ties into the recognition of explicit costs and implicit costs. Explicit costs are direct payments made to others in the course of running a business, such as wage, rent and materials, while implicit costs represent opportunity costs of using resources that the firm already owns.
Moreover, they would calculate accounting profit by subtracting explicit costs from revenues, as indicated in the example: Revenues of $200,000 minus explicit costs of $85,000 would result in an accounting profit of $115,000.