The Effects of Accounting Entries
Revenue Recognition Principle:
Accounting entries used for Revenue Recognition Principle are required as procedures if regular business transactions include the acceptance of advance payments. It is important that these advance payments be recorded even if the transactions are not, as yet, fully consummated due to pending delivery or performance of the business product or trade.
Accounting logic requires that the monies received as advance payments be initially recorded as business liabilities. It is only when the goods are delivered or the service has been performed that these advance payments will be recognized as income from business operations.
Thus, there are two sets of accounting entries being used:
(1) The first set is upon acceptance of the advance payment, wherein a liability account is created;
Cr. Unearned Revenue (e.g. Unearned Premiums, Unearned Subscriptions, Security Deposit Received)
(2) The second set is upon performance or delivery of the goods, wherein the liability account previously created will be recognized as revenue or income.
Dr. Unearned Revenue (e.g. Unearned Premiums, Unearned Subscriptions, Security Deposit Received)
Cr. Revenue from Premiums or Revenue from Subscriptions
We can include accounting entries for year-end closing, which are also known as post-closing adjusting entries, as part of the Revenue Recognition Principle. However, since we are making a comparison between the two Principles, the effect of the accrual adjusting entries will then be discussed as explanations to Matching Principle.