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Is it important to have external transactions to support the amount of revenue recorded? State a...

Is it important to have external transactions to support the amount of revenue recorded? State a case in current accounting practice where revenue or profits are not directly based on external transactions and state the reasons for this exception. Please explain.

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Answer #1

The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected. For example, a snow plowing service completes the plowing of a company's parking lot for its standard fee of $100. It can recognize the revenue immediately upon completion of the plowing, even if it does not expect payment from the customer for several weeks. This concept is incorporated into the accrual basis of accounting.

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