What is the revenue recognition principle? What is the expense recognition principle? Why are they important to financial reporting?
In order for organizations to provide reliable, relevant, and transparent financial information to owners, managers, investors, lenders, and the IRS they must use accrual based financial accounting systems. The revenue recognition principle necessitate that organizations recognize their revenue during the accounting time period that it is earned, not necessarily received. The time period that the income is earned is considered the time period in which the service was performed or the credit was extended. The expense recognition principle is used to match expenses with revenues during the period of time when the service is extended to generate the revenue..