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Applying Booked, Recognized, and Posted to the Bar Example

~ In the bar example per accrual where - the bar provides the service before receiving the money. They accrue the expense when the service is provided, even though payment hasn't been received yet.) 

How do these three terms figure?

Scenario: A customer orders a drink at a bar, consumes it, and agrees to pay later.

  1. Booked: When the bartender records the drink order on the customer's tab, it's essentially "booked" as an expense. This might be recorded in a sales journal or directly in the inventory system (if the bar tracks inventory of drinks).
  2. Recognized: The expense is "recognized" when the customer consumes the drink. This is because the performance obligation (providing the drink) has been fulfilled. The bar would record a debit to Cost of Goods Sold (or a similar expense account) and a credit to Inventory.
  3. Posted: At the end of the day or accounting period, the bar would "post" these transactions to the general ledger. This means transferring the journal entries from the sales journal or inventory system to the appropriate general ledger accounts (e.g., Cost of Goods Sold, Inventory, and Accounts Receivable).

In summary:

  • Booked: The initial recording of the drink order.
  • Recognized: Acknowledging the expense when the drink is consumed.
  • Posted: Transferring the transactions to the general ledger.

This example demonstrates how the terms "booked," "recognized," and "posted" can be applied in a real-world scenario involving accrual accounting.

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In accrual accounting, the terms "booked," "recognized," and "posted" are often used interchangeably, but they can have slightly different connotations.

Booked

  • Meaning: Generally, "booked" refers to the initial recording of a transaction or event in the accounting system. This might include entering data into a journal or ledger.
  • Example: When a sale is made, the transaction might be "booked" by recording a debit to Accounts Receivable and a credit to Sales Revenue.

Recognized

  • Meaning: "Recognized" often implies a more formal acknowledgment of the financial impact of a transaction or event. It's often used in the context of revenue recognition, where revenue is officially acknowledged as earned.
  • Example: In accrual accounting, revenue might be "recognized" when the performance obligation of a contract is fulfilled, even if cash hasn't been received yet.

Posted

  • Meaning: "Posted" typically refers to the process of transferring journal entries to the general ledger. This is the final step in the accounting cycle, where the transactions are summarized and made available for financial reporting.
  • Example: After a journal entry is created to record a sale, it would be "posted" to the general ledger accounts (e.g., Accounts Receivable and Sales Revenue).

In many cases, these terms are used interchangeably. However, understanding their nuances can be helpful in specific contexts. For instance, a transaction might be "booked" immediately upon occurrence, "recognized" at a later date when certain criteria are met (e.g., fulfilling a performance obligation), and "posted" to the general ledger at the end of the accounting period.

To summarize:

  • Booked: Initial recording of a transaction.
  • Recognized: Formal acknowledgment of the financial impact, often used in revenue recognition.
  • Posted: Transferring journal entries to the general ledger.

 

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