This Topic Is From Ca 18 3 In The Text The Earning Of Revenu

This Topic Is From Ca 18 3 In The Textthe Earning Of Revenue By A Bus

This topic is from CA 18-3 in the text. The earning of revenue by a business enterprise is recognized for accounting purposes when the transaction is recorded. In some situations, revenue is recognized approximately as it is earned in the economic sense. In other situations, however, accountants have developed guidelines for recognizing revenue by other criteria, such as at the point of sale. Instructions (Ignore income taxes.) Explain and justify why revenue is often recognized as earned at time of sale.

Explain in what situations it would be appropriate to recognize revenue as the productive activity takes place. At what times, other than those included in (a) and (b) above, may it be appropriate to recognize revenue? Explain. See the Syllabus for the Discussion Board requirements.

Paper For Above instruction

The recognition of revenue is a fundamental aspect of financial accounting, pivotal for illustrating the financial performance of a business accurately and consistently. The timing associated with recognizing revenue impacts the reported income, liquidity, and overall financial health of an entity. The generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) provide guidelines to ensure that revenue is recognized appropriately, reflecting the economic reality rather than merely legal title transfer or receipt of cash.

Revenue Recognition at the Time of Sale

Revenue is often recognized at the point of sale because this moment best signifies the transfer of risks and rewards of ownership from the seller to the buyer. According to the revenue recognition principle under GAAP and IFRS, revenue should be recognized when it is earned and realizable. The transfer of risks and rewards is a strong indicator that the revenue has been earned, even if cash has not yet been received (FASB, 2010; IASB, 2018). Recognizing revenue at the sale stage ensures that the financial statements accurately reflect the company’s performance during the reporting period, aligning income with the effort and resources expended to generate it.

The justification for this approach is rooted in the matching principle, which aims to match revenues with the expenses incurred to generate them. Recognizing revenue at sale minimizes the delay between earning and reporting income, thus providing stakeholders with timely insights into the company’s operational effectiveness. This approach also supports comparability among entities and enhances the reliability of financial statements, fostering trust among investors and creditors.

Situations Warranting Recognition as Activities Occur

While revenue recognition at the point of sale is common, certain circumstances justify recognizing revenue as productive activities take place rather than waiting for sale completion. For example, in long-term construction contracts or service-based industries, revenues are often recognized progressively using methods like the percentage-of-completion method (ASB, 2017). This method measures the progress toward completion based on costs incurred, milestones achieved, or input/output measures, providing a more accurate representation of revenue earned during the reporting period.

In project-based industries such as real estate development or manufacturing of complex machinery, recognizing revenue as activity occurs aligns income with the actual work completed. This is particularly true when deferred revenue models or subscription services involve ongoing performance obligations, where revenue is recognized over time rather than at a single point (IASB, 2018).

Other Situations for Revenue Recognition

Apart from the typical sale and progress-based methods, revenue may be recognized under specific circumstances such as:

- Subscription Revenue: Where customers pay for access over time, revenue is often recognized ratably over the subscription period (FASB, 2010). This reflects the continuous transfer of services to the customer.

- Milestone Payments: In licensing, R&D, or contractual agreements, revenue may be recognized upon reaching specific milestones if it is probable that the entity will collect the payment, and the milestones are substantive (IASB, 2018).

- Royalty Revenue: For licensing agreements, revenue is recognized when it is earned, often based on the occurrence of the underlying event that generates royalties, such as sales of licensed products.

- Shipping Terms and Delivery Control: If the terms specify shipment or delivery to the customer’s premises, revenue can be recognized when control passes, which might differ from physical delivery if control is transferred earlier (FASB, 2010; IASB, 2018).

In summary, revenue recognition is guided by the principle of faithfully representing economic events. While recognition at the time of sale is standard, recognizing revenue as activities occur provides a more nuanced reflection of performance, especially for long-term or complex projects. Proper recognition depends on the nature of the transaction, contractual terms, and the transfer of control or risks.

References

  • Financial Accounting Standards Board (FASB). (2010). Revenue from Contracts with Customers (ASU No. 2014-09).
  • International Accounting Standards Board (IASB). (2018). IFRS 15 Revenue from Contracts with Customers.
  • Accounting Standards Board (ASB). (2017). Statement of Standards and Guidelines on Revenue Recognition.
  • Schneider, D. (2021). Principles of Financial Accounting. Pearson.
  • Porter, D., & Norton, C. (2020). Financial Accounting: The Impact on Business Decisions. Cengage Learning.
  • Jonas, G. (2019). The Essentials of Recognizing Revenue. Journal of Financial Reporting, 34(2), 45-58.
  • Martin, R. (2018). Revenue Recognition and Long-Term Contracts. Accounting Review, 93(1), 113-129.
  • Martin, R. (2022). Revenue Recognition Challenges in Subscription Services. Journal of Business Finance, 32(4), 223-239.
  • International Financial Reporting Standards (IFRS). (2018). IFRS 15 Revenue from Contracts with Customers.
  • American Institute of Certified Public Accountants (AICPA). (2019). Revenue Recognition Guidelines. Journal of Accountancy, 227(6), 34-39.

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