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Chapter 6

Chapter 6 – Revenue recognition.docx

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ACC 414
Else Grech

Chapter 6 – Revenue recognition ECONOMICS OF BUSINESS TRANSACTIONS  Sales of goods, services or both?  sales of goods and services are different o Goods are tangible assets  There is a definite point in time when control over the goods or the item being sold passes to the buyer transfer of possession (legal title) o Services  There is no legal title and concept of possession o Both (multiple deliverable or bundled sale)  May cause problems when goods and services are sold for one price  Transfer of possession and legal title of the goods might pass before, after, or during the time of rendered service  What is being received o Transactions are reciprocal  a business is giving something up in and receives something in return  Price risk  where the risk that the price of an asset will change o Transactions are at arm’s length  when a business is giving something that they value evenly to what they are receiving in return  Acquired  consideration or rights to the consideration  Given up  goods/services as well as detail regarding delivery o Barter or non-monetary transactions  when little to no monetary assets are received as consideration  Difficult to measure under accounting principles  Generally considered a sale if the transaction has commercial substance  the transaction is a bona fide purchase and sale and that the entity has entered into the transaction for business purposes  After the transaction, the entity will be in a different position and its future cash flows are expected to change significantly as a result of the transaction  Concessionary (or abnormal) terms  “are the selling terms normal business practices for the company o Terms that are more lenient than usual and are meant to induce sales o Create additional obligations or may reflect the fact that the risks and rewards or control has not yet passed to the customer  Legalities o Contract law  Contract with a customer is an agreement that creates enforceable obligations and establishes the terms of the deal (exchange of assets)  Promisor  seller Agreement  Promise  the customer 1  Constructive obligation  an obligation that is created through past practice or by signaling something to potential customers ACCOUNTING FOR SALES TRANSACTIONS – RECOGNITION AND MEASUREMENT  Revenue : An inflow of economic benefits  arising from ordinary activities o Realization  the process of converting noncash resources and rights into money o Earnings approach : focuses on the earnings process and how a company adds value to its customers  Seen primarily as an income statement approach to accounting for revenues  Performance must be substantially complete o The risks and rewards are transferred and/or the earnings process is substantially complete o Measurability is assured  Collection is reasonably assured  There must be a critical event in the earnings process that signals substantial completion or performance (referred to as a discrete earning process)  (ex: when the risks and rewards of ownership pass  point of delivery)  Selling services  focus on performance of the service  May be more complicated if the earnings process has numerous significant events  Percentage of completion method: revenues and gross profit are r
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