Recognition Concept

Recognition Concept

Recognition is simply the inclusion of element of financial statement in either in statement of financial position or in statement of comprehensive income. There are two basic criteria for recognition i.e. identification of element and measurement of amount associated with element.

It means if an element is identified i.e. expense, asset, liability, equity and amount can be measured reliably, then it is recognized in the financial statement.

1.    Asset Recognition

Asset recognized when it is expected that future benefit associated with asset will flow to the organization, which will either will increase the assets of organization or reduce the liabilities of organization, and those inflow can be measured reliably. When the future benefit are not expected, then asset is not recognized, instead expense is recognized.

2.    Liability Recognition

When it is expected that liability will be settled and the amount of settlement can be calculated with reliability, then liability is recognized. When it is expected that a liability will not be settled, then it is recognized as income. Liability can be settled in many ways , liability settlement concept has been explained in my other article.

3.    Expense Recognition

Expense is recognized in the financial statement, when amount of expense can be measured reliably and that economic benefit received by the business. For example labour has performed (economic benefit received) and labour salary rate is fixed (expense can be measure reliably). We can record this salary in the financial statement as salary.

Measurement Concept