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ACC 110 (66)
Chapter 4

Chapter 4

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Department
Accounting
Course
ACC 110
Professor
Brad Mac Master
Semester
Fall

Description
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 - Delayed until after goods have been delivered or services provided to customers in some situation - Delay is appropriate if the risk and rewards of ownership haven’t transferred at the time of deliver or if there are significant uncertainties about costs, revenue, or collection. - Example of uncertainties: warranty, returns, cash collection - Consignment sales (producer/distributor transfers merchandise to another entity, which agrees to try to sell the merchandise) Gradual Approach to Recognizing Revenue - Recognizes revenue bit by bit over the entire earning process rather than a particular critical even occurs The Percentage-of-Completion Method - Method used for recognizing revenue on service and long-term contract, which spreads revenue and expenses associated with a contract over the contract’s life. Completed-contract method - Recognizes revenue in full when a contract is completed - No revenue is reported until the contract is complete and all expenses on contract are deferred until the revenue is recognized, when they are expensed and matched to the revenue Recognition - When any financial statement element – asset, liability, equity, expense or revenue is recorded - Item under consideration meets the definition of an element - Economic cost or benefit associated with element will occur - Element can be measured Expense Recognition - Match expenses with revenues - Accounting estimates play a role – Bad debts expense: estimate of the amount owed by customers that won’t be collected – Returns – Warranty costs - Cost expensed in the period they are incurred are called Period costs - Costs that can be matched to speci
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