Question
A company follows the accrual basis of accounting and
recognizes revenue when the goods are dispatched, not when cash is received. However, in its final accounts, it also mentions that revenue is recognized only when it is reasonably certain. Which two accounting concepts does this scenario illustrate, and how do they together ensure the reliability of financial information?Solution
The company recognizes revenue upon dispatch, which reflects the Revenue Recognition principle. However, by waiting until revenue is “reasonably certain,” it applies the Prudence (Conservatism) concept, avoiding overstatement of income. These concepts together help ensure that income is neither overstated nor recognized prematurely.
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