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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.

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    Revenue Recognition: Timing and Criteria for Proper Accounting Practices Judgment 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 in the 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 activity takes place. 3. At what times, other than those included in (1) and (2) above, may it be appropriate to recognize revenue? Judgment Case 5 - 2 Requirement 1 While revenue often is earned during a period of time, revenue usually is recognized at a point in time when both revenue recognition criteria are satisfied. These criteria usually are satisfied at the point of delivery. The revenue has been earned and there is reasonable certainty as to the collectibility of the asset (cash) to be received. Usually, significant uncertainties exist at the time products are produced. At point of delivery, the product has been sold and the price and buyer are known. The only remaining uncertainty involves the ultimate cash collection, which can usually be accounted for by estimating and recording allowances for possible return of the product and for uncollectibility of the cash. Requirement 2 It would be useful to recognize revenue as the productive activity takes place when the earnings process occurs over long periods of time. A good example is long - term projects in the construction industry. Requirement 3 Some revenue - producing activities call for revenue recognition after the product has been delivered. These situations involve significant uncertainty as to the collectibility of the cash to be received, caused either by the possibility of the

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