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Revenue Recognition: Timing and Criteria for Proper Accounting Practices

This paper discusses the principles of revenue recognition and the importance of adhering to proper accounting practices.

Lily Green
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Revenue Recognition: Timing and Criteria for ProperAccounting PracticesJudgment Case 5-2 (page 291)Revenue earned by a business enterprise is recognized for accounting purposes at different times,according to the circumstances. In some situations revenue is recognized approximately as it is earned inthe economic sense. In other situations revenue is recognized at point of delivery.Required:1.Explain and justify why revenue often is recognized as earned at point of delivery.2.Explain in what situations it would be useful to recognize revenue as the productive activitytakes place.3.At what times, other than those included in (1) and (2) above, may it be appropriate torecognize revenue?Judgment Case 5-2Requirement 1While revenue often is earned during aperiodof time, revenue usually isrecognized at apointin time when both revenue recognition criteria are satisfied.These criteria usually are satisfied at the point of delivery.The revenue has beenearned and there is reasonable certainty as to the collectibility of the asset (cash) tobe received.Usually, significant uncertainties exist at the time products are produced.Atpoint of delivery, the product has been sold and the price and buyer are known.The only remaining uncertainty involves the ultimate cash collection, which canusually be accounted for by estimating and recording allowances for possiblereturn of the product and for uncollectibility of the cash.Requirement 2It would be useful to recognize revenue as the productive activity takes placewhen the earnings process occurs over long periods of time.A good example islong-term projects in the construction industry.Requirement 3Some revenue-producing activities call for revenue recognitionaftertheproduct has been delivered.These situations involve significant uncertainty as tothe collectibility of the cash to be received, caused either by the possibility of the

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Accounting

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