Concepts, Rules, and Examples
The AICPA has defined service transactions as follows:
…transactions between a seller and a purchaser in which, for a mutually agreed price, the seller performs, agrees to perform, agrees to perform at a later date, or agrees to maintain readiness to perform an act or acts, including permitting others to use enterprise resources that do not alone produce a tangible commodity or product as the principal intended result.
Generally accepted accounting principles require that revenue generally be recognized when (1) it is realized or realizable and (2) it has been earned. With respect to service transactions, the AICPA concluded
…revenue from service transactions [is to] be based on performance, because performance determines the extent to which the earnings process is complete or virtually complete.
In practice, performance may involve the execution of a defined act, a set of similar or identical acts, or a set of related but not similar or identical acts. Performance may also occur with the passage of time. Accordingly, one of the following four methods can serve as a guideline for the recognition of revenue from service transactions:
The specific performance method
The proportional performance method
The completed performance method
The collection method
Service vs. Product Transactions
Many transactions involve the sale of a tangible product and a service; therefore, for proper accounting treatment, it must be determined whether the transaction is primarily ...