Revenue Recognition - Explained
What is Revenue Recognition?
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Table of ContentsWhat is Revenue Recognition?How is Revenue Recognition Used?Conditions for Revenue RecognitionGenerally Accepted Accounting Revenue Recognition PoliciesAcademic Research on Revenue Recognition
What is Revenue Recognition?
Revenue recognition is a generally accepted accounting principle (GAAP) which decides on the particular requirements for the recognition of, or the accountancy of revenue. Revenue is generally measured or recognized when sometime crucial might have happened to the firm, and the revenue amount is calculable. There are also different situations were revenue recognition might take place apart from the examples given above.
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How is Revenue Recognition Used?
Revenue is the total monetary value of a company or entity, and its for this sole purpose that private businesses are established. Firms are dependent on sales, since the absence of demand and supply will crippled them, thus making liquidation and bankruptcy declaration the next available option. Due to this reason, some firms might modify what qualifies as revenue in their operations, especially in situations where all parts of the total revenue is not necessarily collected by the end of a work. This pushes regulators to always be on the lookout. Simply put, most laborers have different billing methods. A consultant therapist might bill you per hour, and the invoice is usually present after the session is over. An auctioneer gets paid on a percentage basis, and usually receives his payment after the sales and related paperworks have been signed. An underwriter might choose to stick with fixed prices. The relationship between all parties in this case is that they usually provide their invoices after the work is completed. As such, analysts show concern over a firms revenue regulation policies and regulations and are satisfied to know that it matches industry standards. This way, unequal comparisons will be eliminated using line items from the financial statement of firms in the industry.
Conditions for Revenue Recognition
This principle states that revenues are only recognized when they are recognized and earned, as opposed to merely receiving them. In this case, realization means that a customer as received a good or service, but the payment for such commodity is still on the way. Earned revenue on the other hand refers to the total goods that has been provided. Also, the revenue generating exercise is expected to be completely or mostly concluded to include its revenue at the particular period of accountancy, and there must exist, a reasonable degree of certainty that earned revenue will be fulfilled. Also, any cost associated with the revenue must be accounted for, alongside the revenue in the same period of accountancy.
Generally Accepted Accounting Revenue Recognition Policies
The Financial Accounting Standards Boards (FASB) and the International Accounting Standard Boards (IASB) on the 28th of May, 2014, jointly issued Accounting Standards Codification (ASC) 606, regarding revenue from customers contracts. This new standard, the ASC 606 presented the structures for recognizing the revenues generated from contracts with customers. There were initially two guidance; the old and the new guidances. The old guidance was generally industry-specific, and it created a system out of the different policies in the industry in which it is applied. The new guidance on the other hand was meant to replace the old guidance, and was built in a one-size-fits-all model, as it was specific to all industries all at once and provided transparency. According to the ASC 606, revenue is recognized when delivered commodities are equivalent to the amount paid for such commodities. This principle has five basic steps that allows for revenue recognition. They are:
- Contract identification
- Identification of contractual performance duties
- Determination of the amount of transaction prices
- Allocation of determined price to the identified contractual obligations
- Recognition of revenue when the performing entity satisfies performance duties.
Academic Research on Revenue Recognition