The revenue recognition principle provides that revenue is to be recognized when (1) it is realized or realizable and (2) it is earned. This rule sounds simple enough, but the many methods of marketing products and services make it extremely difficult to apply in certain situations. Although a large percentage of entities find it appropriate to recognize revenue at the point of sale (delivery) of a good or service, other entities find it appropriate to use some other basis of revenue recognition which may result in recognizing revenue prior to delivery or at a point in time after delivery. In this chapter, we discuss accounting guidelines for the recognition of revenue.
SUMMARY OF LEARNING OBJECTIVES
1. Describe and apply the revenue recognition principle. The revenue recognition principle provides that a company should recognize revenue (1) when it is realized or realizable and (2) when it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash. Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earning process is complete or virtually complete.
2. Describe accounting issues involved with revenue recognition at point of sale. The two conditions for recognizing revenue ...