Revenue recognition
August 12, 2010, 12:00 am
Copyright © 2010 Integrated Profitability TM
Revenue recognition is an accounting discipline. The observations below are not from an accountant and should not be relied upon as such. Rather, they are higher-level thoughts on how one can think about revenue and its drivers and challenges.
Monetary-based
How are prices paid by customers?
● Cash
● Credit Card
● Check
● Terms (account receivables)
Obligation-based
Revenue is recognized when an obligation to pay is created. Actual payments may be based on different event-triggers:
● Signing of contract
● Work in Progress
● Delivery of goods/completion of service
Cash basis vs. Accrual basis
Businesses need to consistently use one or the other basis for their financial books:
● Cash: revenue is recognized when you have the cash: without any possibility of it being reversed.
● Accrual: revenue is recognized the moment someone has a legally-enforceable obligation to pay you
Business conditions
The following are related to pricing and/or revenue:
● Discounts: a lowering of price prior to a sale. As such, the discounted portion cannot be revenue since the customer never had an obligation to pay that amount.
● Rebates: a return of part of the price collected. As such, rebates are negative revenue. To be accurate, the concept of “realized price” must be the amount after the rebate.
● Refunds: a return of an item purchased that results in a partial or full refund of the amount collected. In this case, price is unaffected; the refund is negative revenue.
● Non-payment: when the customer does not pay the price. On an accrual basis, the original sale price is booked as revenue, and the ultimate realization that the price will not be collected will cause an entry of negative revenue. On a cash basis, you never had anything to book.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 75
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
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