Question

The recognition principle states that:

A. sales should be recorded when the payment for that sale is received.
B. costs should be recorded when paid.
C. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.
D. costs should be recorded on the income statement whenever those costs can be reliably determined.

Answer 1

The recognition principle states that sales should be recorded when the earnings process is virtually completed and the value can be determined, which corresponds to choice C. This principle is important for distinguishing between accounting profit and economic profit.

Step-by-step explanation:

The recognition principle is integral to accrual accounting and dictates when revenues and costs should be recorded. The correct statement for the recognition principle is: C. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined. This principle ensures that revenues are recognized in the accounting period in which the goods have been delivered or services performed, irrespective of when the payment is received.

Understanding this principle is crucial for differentiating between accounting profit and economic profit. Accounting profit considers total revenue minus explicit costs, which represents a cash perspective focusing on actual financial transactions. In contrast, economic profit accounts for both explicit and implicit costs, considering the overall economic value added or consumed by the business activities, which is more comprehensive than the accounting profit measure.