Question

Identify the accounting concept or principle that gives the most direction on how to account for each of the following

situations:
a. Salary expense of $48,000 is accrued at the end of the period to measure income properly.
b. March has been a particularly slow month, and the business will have a net loss for the second quarter of the year. Management is considering not following its customary practice of reporting quarterly earnings to the public.
c. A physician performs a surgical operation and bills the patient’s insurance company. It may take three months to collect
from the insurance company. Should the physician record revenue now or wait until cash is collected?
d. A construction company is building a highway system, and construction will take four years. When should the company
record the revenue it earns?
e. A utility bill is received on December 27 and will be paid next year. When should the company record utility expense?

Answer 1

A) Expense recognition principle: expenses are recorded in the accounting periods at which they are consumed.

B) Time period principle: companies should report their operations over a standard period of time.

C) Revenue recognition principle: revenue should only be recognized when the company has substantially completed the earnings process. In this case the surgeon has completed the earning process, i.e. the surgery, so he/she should record the revenue.

D) Revenue recognition principle: revenue should only be recognized when the company has substantially completed the earnings process. construction companies use two methods to record revenue: percentage of completion (PC) method and completed contract (CC) method.

E) Expense recognition principle: expenses are recorded in the accounting periods at which they are consumed. The expenses has to be recorded this year.