Principles 2 and 3: Accrual Basis

Accrual basis of accounting is one of the most important concepts in accounting, and governs the company’s timing in recording its revenues (i.e., sales) and associated expenses.

  • Principle 2: Revenue Recognition. Accrual basis of accounting dictates that revenues must be recorded when earned and measurable.

  • Principle 3: Matching Principle. Under the matching principle, costs associated with making a product must be recorded (“matched” to) the revenue generated from that product during the same period.

4. Amazon.com Sells a Book
Exercise
Q1:The following transactions occurred on the specified dates:

  • Amazon.com purchases a book from a publisher for $10 on May 5, 2006.

  • Amazon.com receives a $20 credit card order for that book on December 29, 2007.

  • The book is shipped to the customer on January 4, 2008.

  • Amazon.com receives cash on February 1, 2008.

From the options above, when should Amazon.com record revenue? Expenses?

4. Amazon.com Sells a Book
Solution
Q1:In line with the accrual principles of accounting, Amazon.com will record $20 in revenues and $10 in expenses on January 4, 2008.

  • Amazon.com purchases a book from a publisher for $10 on May 5, 2006.

  • Amazon.com receives a $20 credit card order for that book on December 29, 2007.

  • The book is shipped ...

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