ACC 110 Chapter Notes - Chapter 4: Financial Statement, Income Statement

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1 Dec 2011
Department
Course
Accounting Chapter 4
Revenue Recognition
- Revenue is an economic gain earned by an entity from providing goods or services to
customers.
When revenue is recognized
DR. Cash (asset +) or Account Receivable (asset +) or Unearned revenue
(liabilities -) xxx
CR. Revenue (Revenue +, owners’ equity +)
xxx
To record revenue
- Income statement account for revenue credited and balance sheet debited when revenue
recognized
- Any activity by entity to make a good or service available or valuable to customers
represents economic gain or revenue
Two approaches:
Critical-Event Approach
- single point in the earning process where 100% of the revenue in a transaction is
recognized
- common for sale of goods or provision of one-time services
Gradual Approach
- most often, revenue is recognized in stages, over time, in proportion to some measure of
progress on an activity
- common for continuous services or services provided over an extended period (e.g. long-
term development contracts, interest on long-term loans)
The critical-Event Approach
[IFRS] 5 criteria for identifying the critical for recognizing revenue on the sales of goods:
Performance (by entity)
1. Significant risks & rewards transferred
2. Seller has no involvement or control over the goods
- Customer purchases merchandise and takes delivery. Might not have occurred on delivery
if buyer resell the merchandise before the seller gets paid or seller has to install the goods
and installation is a significant part of the purchase
Collectability
3. Collection of payment is reasonably assured
Measurability
4. The amount of revenue can be reasonably measured
5. The costs of earning the revenue can be reasonably measured
Qualitative Characteristics
Understandability
Comparability
Relevance
- deals with timely(information can’t be too old), predictive and feedback value(right or
wrong)
Reliability
- Neutrality (free from bias), verifiability
Critical Events
Delivery
- Buyer takes possession of the goods or receives the service (single exchange) being sold
Completion of Production
- Revenue recognized as soon as the product is produced, even if hasn’t been delivered to
the customer, sale of the product is assured and the costs of selling and distributing it are
minor.
Revenue Recognition after Delivery
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