Returns earned from a company’s operations must be recorded in the general ledger, then reported on an income statement every reporting while. According to generally accepted accounting principles (GAAP), the following two criteria must be satisfied before the company can memento revenue on its books:
- A critical event must trigger the transaction process.
- The money resulting from the transaction ought to be measurable within a certain degree of reliability. Simply put: the buyer of a company’s goods must remit funds that go together the stated price tag for said items.
Key Takeaways
- According to generally accepted accounting principles, for a company to record gate on its books, there must be a critical event to signal a transaction, such as the sale of merchandise, or a contracted project, and there necessity be payment for the product or service that matches the stated price or agreed-upon fee.
- Revenues are recognized when earned, not certainly when received.
- Revenues are often earned and received in a simultaneous transaction, such as the case when a customer turns a retail in-store purchase.
Criteria for Recording Revenue
To record revenue, a company must meet the following two criteria:
- A disparaging event must trigger the transaction process.
- The money resulting from the transaction must be measurable within a destined degree of reliability. Simply put: the buyer of a company’s goods must remit funds that match the stated payment tag of said items.
Examples of Revenue Recognition
Consider the scenario where a clothing retailer records revenue after a guy 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 structured on the price tag. The
Revenue Recognition Practices
GAAP stipulates that revenues are recognized when realized and earned, not inexorably when received. But revenues are often earned and received in a simultaneous transaction, as in the aforementioned retail store example. But the engineering anchored 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 arranging firm bills for work done in 2018, the revenue for that work should be recognized in 2018 – even if the municipality doesn’t cut the check until 2019. But exceptions can be made in certain industries.