FASB Revenue Recognition Essay Example | Topics and Well Written Essays - 500 words

FASB Revenue Recognition - Essay Example ccounted principles (GAAP) establish the standards, rules and procedures which accountants must follow when realizing bookkeeping and accounting work. The GAAP framework is developed through a series of assumptions, principles and constraints. Two important principles Legal Plan Services should keep in mind are revenue recognition principle and the matching principle for expenses. The revenue recognition principle stipulates that revenues should be recognized when the work is realizable and earned. Receiving cash does not imply the business has performed the work. â€Å"Expenses are recognized not when the work is performed, or when the product is produced, but when the work or product actually makes its contribution to revenue† (Wikipedia). Administration expenses do not follow the matching principles since they are not directly linked to the creation of specific revenue, they are considered period costs. The best way for Legal Plan Services to present a report that clearly presents the amount of revenues and expenses in a reliable, comparable and consistent manner is through the financial statement called income statement. The income statement is divided into two parts within the report. At the top of the report revenues are illustrated, while the bottom part gives the user information about the expenses the company incurred. In the income statement the company should include notes to the statement to explain the practices utilized for creating revenues and recognizing expenses. The company has serious flaws in both its revenue and expense recognition methodology. The company is collecting money from customers for a service they will provide in the near future. This event behaves like unearned revenue. Unearned revenue is sometimes referred to as deferred revenue (Weygandt & Kieso & Kimmel, 97). In the ledger of the company the journal entry would be a debit to cash and a credit to unearned revenue. At the time the company provides the service the journal entry