When to recognize revenue
/What is Revenue Recognition?
Revenue recognition is the process of deciding when to record revenue as the result of a sale transaction. This typically occurs after you have proven that a contract exists between you and the customer, that all performance obligations stated in the contract have been fulfilled, and that you can measure the dollar amount of the sale. A performance obligation typically involves the delivery of some type of good or service to the customer.
Revenue Recognition in Accrual Basis Accounting
The criteria just noted for revenue recognition are required for accrual basis accounting, where revenue is recognized once it has been earned. This differs from revenue recognition under the cash basis of accounting, where revenue is recognized when cash is received from the customer. Thus, the recognition of revenue under the accrual basis of accounting does not necessarily coincide with the receipt of a customer’s payment.
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Criteria for Revenue Recognition
More specifically, an entity can record revenue when it meets all of the following criteria:
The price is substantially fixed at the sale date.
The buyer has either paid the seller or is obligated to make such payment. The payment is not contingent upon the buyer reselling the product.
The buyer’s obligation to pay does not change if the product is destroyed or damaged.
The buyer has economic substance apart from the seller.
The seller does not have any significant additional performance obligations related to the sale.
The seller can reasonably estimate the amount of future returns.
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