Question

What criteria must be met to recognize an economic event?

Answer 1

Economic events that have impact on company's finances are to be recognized.These have an impact on the financial balances.Some examples of such event are :

• Sale of Goods
• Purchases from Suppliers
• Salary payments
• Insurance payments
• Depreciation of Fixed Assets etc.

All the above have impact on a company's finances and account balances and hence are to be recognized with the equation principal of Assets = Liability + Equity.

Not all economic activities need to be recognized.For instance:

• Placing a Purchase Order
• Appointing staff
• Reminders for collections

All are economic activities but donot change the finances of a company and hence are not to be recognized.

There can also be economic events internal to the organization that qualify to be recognized like:

• Inter division material transfers
• Cross charging of costs within an organization
• Depreciation of equipments etc.