Question
A company performs a service in December but is not paid until January. Under accrual-basis accounting, the revenue is recognized in:
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — accrual basis of accounting
Revenue is recognised when earned and expense when incurred, independent of cash movement. For each item ask which period the economic event belongs to, then let the balance sheet carry the difference as a receivable, payable, prepayment or unearned amount.
Common mistakes
- Recognising revenue on receipt of cash in advance rather than as a liability until earned.
- Expensing a payment that covers more than the current period without splitting off the prepaid portion.
- Leaving incurred but unbilled expenses unrecorded because no invoice has arrived.
Further readingThe 5 types of adjusting entry