Your goals for this “income measurement” chapter are to learn about:
- “Measurement triggering” transactions and events.
- The periodicity assumption and its accounting implications.
- Basic elements of revenue recognition.
- Basic elements of expense recognition.
- The adjusting process and related entries.
- Accrual versus cash-basis accounting.
Chapter 3 begins by differentiating between concepts of economic and accounting income. Accounting income is largely driven by the measurement of transactions and events, and assigning them to the correct accounting time periods. This gives rise to a set of general principles for revenue and expense recognition. These principles are at the heart of income measurement and accrual-basis accounting.
Following the conceptual explanation of income measurement, the chapter illustrates how this is put into practice via numerous specific examples. These examples show how revenue and expense recognition principles may necessitate end-of-period accounting adjustments. Don’t just memorize the examples; engage in a conceptual understanding of when, why, and how adjustments are needed to align accounting measurements with the broader goals of assessing business performance.
The chapter concludes by comparing the accrual basis and cash basis of accounting. Generally accepted accounting principles (GAAP) dictate the accrual basis, but many small businesses may nonetheless find it more cost-effective to utilize the much simpler cash basis.