Question

Why are the principles of expense and revenue recognition important in the formation of an income statement?

Answer 1

The revenue recognition principle and the matching principle are two cornerstones of accrual accounting. They both determine the accounting period, in which revenues and expenses are recognized.

The most important reason to follow this principle is that it ensures that your books show what your profit and loss margin is like in real time.

Under the accrual basis of accounting, you should only record revenue when an entity has substantially completed a revenue generation process; so, you record revenue when it has been earned. Same way the corresponding expenditures are recorded in the same period. Thus in formation of income statement, the principles of expense and revenue recognition important to give the correct picture of Net income and loss an entity has earned over a period of time.