What are the criteria for revenue recognition?

Answer 1

CRITERIA FOR REVENUE RECOGNITION

As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the transaction meets both of the following conditions:

1 . Completion of the earnings process. The seller has done all (or nearly all) that it has promised to do for the customer. That is, the seller has delivered all (or nearly all) of the goods and services it has agreed to provide.

2 . Receipt of assets from the customer. The seller has received cash or some other asset that it can convert to cash, for example, by collecting an account receivable.

The first criterion focuses on the seller's performance. Firms recognize revenues from many sales of goods and services at the time of sale (delivery) because that is often the point of completion of the earnings process, in the sense that the seller has transferred the promised goods to the customer or has performed the promised services. Even if some items remain unperformed (for example, promises to provide warranty services and promises to accept customer returns), the seller can recognize revenues as long as the unperformed items are not too great a portion of the total arrangement with the customer, and the seller can reasonably measure the cost of the unperformed items.

The second criterion for revenue recognition focuses on measuring the amount of cash the seller will ultimately receive. The exchange price between the customer (buyer) and seller represents the assets exchanged by the customer for goods and services, and provides the initial measure of revenue.