According to GAAP and IFRS, the accrual basis is the only acceptable method for external reporting of income. The cash basis can be used internally by some small companies, but GAAP and IFRS do not allow it for external reporting. The "rule of accrual" is the financial effects of business activities are measured and reported when the activities actually occur, not when the cash related to them is received or paid. The two basic accounting principles that determine when revenues and expenses are recognized under accrual basis accounting are called the revenue recognition and expense recognition principles. Revenue Recognition Principle At its core, the revenue recognition principle says a seller should report revenue when it provides goods or services to customers, in the amount the seller expects to be entitled to receive. The core revenue recognition principle answers two questions: Q1: When? Revenue is reported when the seller performs work promised to the customer, Q2: How much? in the amount the seller expects to be entitled to receive from the customer. The core revenue recognition principle is applied by following five steps, shown in Exhibit 3.5 . We explain these five steps below. Step 1. Identify the contract. A contract is any agreement between a seller and customer that creates legal rights and obligations. It can be written, verbal, or merely implied. Starbucks establishes a contract when it agrees to sell you a Frappuccino, even though there's no legal paperwork. Step 2. Identify the seller's performance obligation(s). A performance obligation is the work the seller promises to do for the customer. Usually. performance obligations involve transferring control of goods or services to a customer. Some contracts involve only one performance obligation ("a tall mocha Frappuccino, please"). Others involve multiple obligations. Fitness makes two promises when it sells a membership that includes a According to GAAP and IFRS, the accrual basis is the only acceptable method for external reporting of income. The cash basis can be used internally by some small companies, but GAAP and IFRS do not allow it for external reporting. The "rule of accrual" is the financial effects of business activities are measured and reported when the activities actually occur, not when the cash related to them is received or paid. The two basic accounting principles that determine when revenues and expenses are recognized under accrual basis accounting are called the revenue recognition and expense recognition principles. Revenue Recognition Principle At its core, the revenue recognition principle says a seller should report revenue when it provides goods or services to customers, in the amount the seller expects to be entitled to receive. The core revenue recognition principle answers two questions: Q1: When? Revenue is reported when the seller performs work promised to the customer, Q2: How much? in the amount the seller expects to be entitled to receive from the customer. The core revenue recognition principle is applied by following five steps, shown in Exhibit 3.5 . We explain these five steps below. Step 1. Identify the contract. A contract is any agreement between a seller and customer that creates legal rights and obligations. It can be written, verbal, or merely implied. Starbucks establishes a contract when it agrees to sell you a Frappuccino, even though there's no legal paperwork. Step 2. Identify the seller's performance obligation(s). A performance obligation is the work the seller promises to do for the customer. Usually. performance obligations involve transferring control of goods or services to a customer. Some contracts involve only one performance obligation ("a tall mocha Frappuccino, please"). Others involve multiple obligations. Fitness makes two promises when it sells a membership that includes a