Discuss the revenue recognition principle and how the terms “critical event,” “earned,” “realized,” and “realizable” apply to revenue recognition.
What will be an ideal response?
ANSWER:
The most prevalent revenue recognition point is at the point of sale. Other possibilities may arise, however, such as the firm’s “critical event.” The critical event is the operation function that is the most crucial in terms of the earning process. However, ARS 3 states that revenue is earned by the entire process of operations of the firm rather than at one point only.
The conceptual framework of the FASB states that revenue recognition occurs in accordance with two criteria: (1) the assets to be received from the performance of the revenue function are realized or realizable; and (2) performance of the revenue function is “substantially accomplished” (earned). Realized means that the firm’s product or service has been converted to cash or claims to cash, while realizable has been defined as the ability to convert assets already received or held into known amounts of cash or claims to cash.
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