Guidelines for Revenue Recognition

In general, the guidelines for revenue recognition are quite broad. On top of the broad

guidelines, certain industries have specific additional guidelines that provide further

insight into when revenue should be recognized. The revenue recognition

principle provides that companies should recognize revenue (1) when it is realized

or realizable and (2) when it is earned. Therefore, proper revenue recognition

revolves around three terms

 

Revenues are realized when a company exchanges goods and services for cash or

claims to cash (receivables).

Revenues are realizable when assets a company receives in exchange are readily

convertible to known amounts of cash or claims to cash.

Revenues are earned when a company has substantially accomplished what it must

do to be entitled to the benefits represented by the revenues—that is, when the

earnings process is complete or virtually complete.

 

Four revenue transactions are recognized in accordance with this principle:

1. Companies recognize revenue from selling products at the date of sale. This

date is usually interpreted to mean the date of delivery to customers.

2. Companies recognize revenue from services provided, when services have

been performed and are billable.

3. Companies recognize revenue from permitting others to use enterprise assets,

such as interest, rent, and royalties, as time passes or as the assets are used.

4. Companies recognize revenue from disposing of assets other than products

at the date of sale.