Revenues earned from a company's operations must be recorded in the general ledger, then reported on an income statement every reporting period.

According to 澳洲幸运5官方开奖结果体彩网:generally accepted accounting principle🍌s (GAAP), the following two criteria must be satisfied before the company can record revenue on its books:

1. A critical event must trigger the transaction process.
2. The money resulting from the transaction must be measurable within a certain degree of reliability. Simply put: the buyer of a company's goods must remit funds that match the stated price tag for those items.

Examples of Revenue Recognition

Consider a scenario where a clothing retailer records revenue after a customer pays for a new pair of jeans. The critical event occurs when the cashier scans the bar code and rings up the merchandise for a measurable amount, which is the value stated on the price tag. The 澳洲幸运5官方开奖结果体彩网:revenue recognition process is complete after the customer pays for the merchandise. If a custom🧔er returns any items of merchandise, the store separately records that transaction on its books, reducing overall revenues accordingly.

However, more complicated scenarios may occur. Let's say, for example, that a city's transit authority contracts an engineering firm to construct a major highway. Assume this is a vast and complex undertaking that's expected to take five years to complete. Depending on the agreed-upon payment schedule, the engineering firm may 澳洲幸运5官方开奖结果体彩网:record revenues in various ways, although the end total would be the same.

If the municipality pays for the entire project upfront, for example, the engineering firm would record all of t☂he revenue from this service contract at that time. But in the more-likely scenario where the municipality doles out installments over the life of the project, the engineering firm would record the revenues on a periodic basis, as monies are collected. In this example, the critical event is the signing of the contract, and the measurable transactions are the occasions when the engineering firm ℱbills the municipality for services rendered.

Revenue Recognition Practices

GAAP stipulates that revenues are recognized when realized and earned, not necessarily when received. However, revenues are often earned and received in a simultaneous transaction, as in the aforementioned retail store exampleꦓ. And the engineering firm example illustrates how there can be delays between the realization of earnings and the receipt of payment.

When to Record Revenue

According to GAAP, if the engineering firm bills for work done in 2023, the revenue for that work should be recognized in 2023—even if the city doesn't cut the check until 2024. B﷽ut exceptions can be ma𓃲de in certain industries.

The Bottom Line

While it may seem straightforward, revenue recognition can be more complicated than meets the eye. While recording a sales transaction is a simple form of recognizing revenue𒈔, larger contracts may involve revenue being recognized at different stages of the project, such as when certain deliverables have been achieved.