Chapter 6 Revenue Recognition
Understanding Sales Transactions
Critical to understand from a business perspective what is being given up and what is being received
Accounting for revenue is very complex
Much of the complexity is caused by structure of the sales transactions
To properly account for sales transaction accountants must understand the business of the entity and the nature of the
Key questions for understanding the sales transactions from a business perspective are -> what is being given up?
-> what is being received
Normally specified in sales agreements
Economics of Business Transaction
Basics - Are we selling goods, services or both? What is the physical nature of the transaction
Why does this matter for accounting purposes?
Goods -> tangible -> definite point when control over goods sold passes to buyer
Coincides with transfer of possession, and legal title
Reciprocal Nature - What is being received?
Why does the reciprocal nature of transactions matter for accounting purposes?
Assume transactions are at arm length, given up = value received
Sales agreements specify -> (1) acquired - consideration and (2) given up
Barter (non-monetary transactions) is seen as sale if there is commercial substance
Transaction occurs -> entity's