Question

Revenue earned and cost of earning that revenue should be properly identified for a period . Explain this

Answer 1

"Revenue earned and cost of earning that revenue should be properly identified" is a supporting statement for general accounting practices which must be  followed by every entity to show the true picture of its financial position. It states that the revenue earned should be properly allocated in the period it is earned & the same way the cost incurred to earn that revenue must be identified & allocated in respective periods. Proper allocation of revenue & its cost within the earned periods is necessary so as to keep a proper record & also to showcase the correct position of the entity.There are various instances which can cause ambiguity whether the profit has been earned or not like :
a) Goods sold has not reached the buyer;
b) Goods-in-transit;
c) Advance received, goods not dispatched, etc.

Answer 2

The above quoted statements highlights the importance of matching principle. As per the principle the revenues earned during a period should be correctly matched against the expenses incurred by a firm during an accounting period to correctly report the accounting profits earned during a year. Accordingly, there is a need to ascertain and report the corrected revenues and cost of earning revenue so as to account for corrected profits.

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