1. Revenue Recognition – Revenue is recorded when the earnings process is deemed to be complete, and not necessarily when cash is received. The earnings process is usually complete when the transfer of goods takes place, or when services are provided to the customer.

2. Matching/Expense Recognition – Expenses are recorded in the period to which they assist in generating revenue. A simpler way of saying this is that expenses are recorded when the cost is truly incurred, regardless of when cash is paid.

This is the major reason why we need to adjust entries. Let’s explore adjusting entries a bit more.

First, what are they? Why are they necessary?